Why Is Amazon the Most Powerful Platform in the World?
A case study in moving from product to marketplace
Bezos builds businesses like no one else — and arguably better than anyone. Each of Amazon’s five major divisions would be multi-multi-billion dollar businesses on its own.
And each followed exactly the same strategy.
Let me explain.
Platforms
Amazon is a platform company. They want a small (but ever-increasing) piece of all commerce. And to date, things are going according to plan.
But platforms are pretty damn hard to build — you need to aggregate a ton of users or customers. That takes time. And often money, lots of it.
You can’t set out to build a platform. That cannot be your first product.
Selling books
In 1994, Amazon launched, not to build a platform, but instead to build a better online bookstore. It was super niche, super targeted.
But this wasn’t the end-all-be-all, it was phase one. It was a product, a battering ram into the hearts, minds, and homes of consumers. And it worked. It was easy to understand, affordable, and offered a better selection than any library or bookstore.
If customers can’t explain what you do in a sentence or two, they won’t try. This is key for any business.
And as you acquire customers and market share, expansion opportunities present themselves. But in the early days, Amazon sold everything, ensuring great quality and customer service — their main differentiators today.
That wasn’t scalable.
Amazon couldn’t afford to offer (i.e, own) everything. That is way too much capital. It was either compromise on growth (and grow very slowly, with only Amazon-branded products) or open up the platform (likely the original plan).
So in 2000 Amazon started allowing third-party sellers to sell on their site — it worked wonderfully. Fast forward to today. There are over 2M third-party sellers on Amazon accounting for anywhere from ~79–90% of the total products listed on Amazon as of 2015.
Building infrastructure
As Amazon grew, so too did its infrastructure needs. The bandwidth and storage required to host and display images and information across Amazon.com ballooned as the marketplace grew.
Bezos bet big on in-house and decided Amazon ought to own the infrastructure. Better still, why not follow the existing Amazon.com strategy — internal, and then sell externally?
AWS was born out of an internal need and an incredibly well-orchestrated, easy-to-use cloud infrastructure.
That is how Amazon thinks: Solve it once, then sell it — productization 101.
Today AWS is far and away the largest cloud service provider, powering ~42% of the web — more than double Microsoft, Google, and IBM combined and bringing in upwards of $4B per quarter.
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Alexa
The way we interact with technology is changing. Amazon (along with many others) wants to own the space/interface.
Today Amazon is winning big. Alexa is a cross-functional voice assistant/interface which in typical Amazon fashion is compatible with everything. If you are building a voice-enabled device, Amazon wants it to be powered by Alexa — an open ecosystem — even if it cannibalizes hardware sales.
Amazon gets it — the platform is the product.
Voice may well be the next search, but it may mean even more. By owning the interaction, accumulating data, and controlling the customer experience, Amazon is inserting themselves into each and every value chain (a little piece of every pie).
In this instance, Amazon broke its own rule — they built the platform before the product. And that was okay. Consumers already trusted Amazon’s brand (as did developers), meaning buy-in from both major parties.
In the case of the Amazon Echo and other Amazon-branded Alexa products, the goal is attention, not profit. Amazon is crushing Google in terms of smart speakers shipped through a combination of rock-bottom pricing and aggressive marketing and PR — flexing their ecommerce (and Whole Foods) muscle to ensure an Alexa device in every home.
The Second Stage of Platforms
As platforms grow and expand, their values and needs change. Google, Apple, and Facebook needed third-party developers to build the core experience and hook for the platform.
But building on platforms is like playing with fire.
Eventually, platforms reach scale, and existing network effects act as a buffer to competition and value-add to existing users. At this point, platforms no longer need you, and, like so many startups, clone your product and push it to their user base.
You never know when the ground will shift.
Building a Better Wedge
You need a use case — a compelling “have to have this”-type use case — to build a successful platform. Companies without this will struggle — high CAC (cost of acquiring a customer) and high churn.
Startups seeking funding (as well as investors) need to understand these dynamics.
It isn’t about the destination, it’s about the journey. And for platform businesses specifically, planning the correct path is the key to success.
So how do you do it?
The 2+ Step Rule
It takes at least two steps to build a platform from scratch. Even Amazon with Alexa needed both hardware (Step 1) and software (Step 2) to succeed — the Amazon Echo plus third-party developer support.
And even then, they seeded Alexa with a set of skills designed to kickstart the customer experience (Step 2.5).
You only have one chance at a first impression.
If Amazon takes 2.5 steps, startups should take note.
Note: This is true whether you’re building a social media site like Facebook or an IoT, connected home platform — it always takes longer and requires multiple hops.
This is all well and good in theory, but, in practice, how does it work?
1. Determine the end goal
- E.g., build the operating system/platform of VR
2. Determine everything that needs to happen to achieve scale
- X number of VR glasses sold worldwide
- Run your software/OS on Y number of glasses worldwide (where Y > one-quarter of X)
- Get Z number of apps built-in/usable on your platform
3. Create a logical plan to get from point A to point B
- Example 1. Design OS. Kickstart VR goggles. Begin ecommerce sales. Design enough apps/games. Market like crazy → owning platform.
- Example 2. Design OS. Trial and partner with existing manufacturers (open ecosystem or open source). Build developer support with third-party app/game marketplace → owning platform.
- Example 3. Kickstart VR goggles. Partner with OS provider. Begin ecommerce sales. Design enough apps/games and onboard new devs. Market like crazy. Design new OS to replace existing one and boot existing OS from your headsets → owning platform.
- Example 4. Design OS. Kickstart VR goggles. Begin ecommerce sales. Design enough apps/games. Launch new VR products: gloves, haptics, foot sensors, etc., and force compatibility between all → owning platform.
4. Execute and iterate as necessary
This isn’t an exhaustive list, but it illustrates the point. There are a lot of ways to achieve market domination and no perfect path to get there. You have to be able to reach, delight, and retain customers or users to build a profitable, defensible platform business.
Each market is different, but by and large, this strategy works across industries and should be emphasized when strategizing your business.
Common Platform Failures
According to the Harvard Business Review, there are six primary reasons that platforms fail.
1. Failure to optimize “openness” — Twitter pulled their APIs and busted profitable businesses
2. Failure to engage developers — means having to build all the apps and usage in-house
3. Failure to share the surplus — being too greedy (like Facebook is today)
4. Failure to launch the right side — who matters more: buyers or sellers?
5. Failure to put critical mass ahead of money — when do you start advertising or monetizing?
6. Failure of imagination — not realizing that the platform > the products
The 7th-Platform Problem
Remember Google+? It was all the rage for a while. But G+ was inherently a boring Facebook copycat. There was no unique value; it was only inferior in every way.
The seventh-platform problem is competition. You need to be 5–10x better than existing products to get consumers or users to switch.
G+ never got off the ground. The same is true of any platform without sufficient differentiation and value-add. It has to feel organic, not forced. And usually, but not always, copycats feel pretty forced.
Remember, platforms are networks. Network effects matter.
Closing Thoughts
Facebook, Amazon, Apple, Google — today’s most valuable companies are all platforms. That is no coincidence. Platforms have pricing power and aggregate the majority of value.
And while many debate the merits and morals of such a monopolistic system, it’s the world we’re working with.
Originally posted on mattward.io
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About the author
Matt Ward is a multiple exit entrepreneur, growth and strategy consultant, startup advisor, ex-tech investing and futurism podcaster, and occasional angel investor looking to join a venture fund, startup studio, or top accelerator in Zurich, Switzerland to promote and invest in world-positive, game changing entrepreneurs. If you are interested in learning more about me or possibly working together, please feel free to reach out here:
