STL Partners

Telco 2.0 Growth & Innovation

Amazon 2.0: Four Levels of Strategic Business Model Transformation

Summary: Amazon's stock continues to beat the bull market. Its success is based on a four level transformation to a ‘two-sided' strategy. What are the lessons for would-be platform players in all parts of the Telecoms, Media, Technology sector? (November 2009, Executive Briefing Service, Dealing with Disruption Stream, Foundation 2.0)

Introduction

Amazon is a company Telco 2.0 studies closely. Their achievements in terms of logistics, cloud computing, open APIs, and two-sided business models provide great examples of business model innovation. 

In this note, we review Amazon Marketplace and Amazon Web Services as successful examples of transition from one-sided to two-sided business models.

Amazon's Stock Performance

The chart below shows Amazon's performance against Vodafone, one of the better performing Telecoms stocks since 2005

Amazon and Vodafone Stocks and the S&P 500, and Amazon's ‘Two-Sided' Activities 2005-2009

amazon%20stock%20charts%20nov%202009.jpg

Since mid-2007, Vodafone's stock value has broadly followed the S&P500. In contrast, Amazon's stock has seen a massive increase in the last three years in particular despite the crunch-crash in 2008.

Of course, stock graphs are immensely volatile, driven by both internal and external factors, and ultimately few trends are permanent. However there can be little doubt that Amazon has built a very strong business, and key to their success has been a transition from a one-sided "retailer" model, to a ‘two-sided' business model. Amazon's Marketplace service produces 5% of revenues and 30% of profits according to the Harvard Business Review.

The Trading Hub Strategy

Amazon's success is based on a fundamental economic insight; two-sided businesses are common whenever there is a role for a trading hub, a business which helps bridge the gaps of asymmetric information and facilitate trade by creating liquidity. In this role, they tend to exhibit increasing returns to scale - the more people use a stock exchange, the better the prices are likely to be - and therefore tend to become both big, and lasting.

Paul Krugman won the Nobel Prize for Economics by applying the logic of increasing returns to scale to economic geography; in a famous example, he concluded that the Erie Canal was responsible for the emergence of New York as the metropolis of the eastern US. Although the canal was only briefly used before the railways rendered it obsolete, it meant that New York was the only port with a direct connection to the Great Lakes and therefore the Midwest - and therefore, that the railway would go to New York.

Transient changes can therefore have very lasting effects on the map of the economy. Similar processes are visible in the development of stock exchanges, container ports, and Internet exchange points. Amazon CTO Werner Vogels describes the business as a "flywheel", driven by two factors - selection, and low prices.

Amazon's "Flywheel" for Platform / ‘Two-Sided' Business Models

 Telco%202_NSN_Mktg_Forum_presentation_longform%20amazon%202009.jpg

Source: Werner Vogel's Amazon presentation to the Telco 2.0 Executive Brainstorm, 2009

Levels of Strategic Transformation

In this note, we describe Amazon's transition from a pure retailer to a ‘two-sided' business model through four ‘levels'. Part of the Amazon's success is that they continue to improve at each ‘level' rather than remaining fixed in competence achieved at a certain point in time.

Level One: Building Scale and Excellence in One Market

Amazon is best known to everyone, except for very hardcore cloud developers, as a bookshop. The story of how it created an industry-beating logistics system to fulfil orders is beyond the scope of this note, but it's worth noting that there's a circular, reciprocal relationship between two-sidedness and scale - one of those "flywheels". Being the biggest bookshop on the Internet obviously made them a much more interesting proposition for upstream partners, and gave them bargaining strength with the existing wholesale industry.

A Screenshot of Amazon's Early Home Page, c 1994

amazon%20early%20screen%20shot%20nov%202009.jpg

Source: Infonova Presentation to EMEA Telco 2.0 Brainstorm, Nov 2009

The key element here was Vogels' notion of "selection" - the ability to find the products you wanted among a bigger and easier to navigate range of products. Economies of scale in Amazon's distribution and its operational technology meant that the marginal cost of stocking another title was drastically lower than it was for the competition. Holding more titles meant that readers are more likely to find what they are looking for. It also means that there was more scope for fancy recommendation mechanisms, to help readers find and buy other relevant products.

This was Amazon's 1.0 period - the keys to its success were scale and investment in logistics, a simple but effective operational excellence strategy. That goes for digital logistics as well.

To read the rest of this Analyst's Note, covering:

  • Level Two: Users Sell and Recommend Amazon Products
  • Level Three: Amazon Sells Users' and Others' Products
  • Level Four: Amazon creates new products and services by leveraging core assets in new ways
  • Amazon's Key IT Services
  • Better Wholesale
  • Conclusion and Lessons for Would-be Platform Players

...Members of the Telco 2.0TM Executive Briefing Subscription Service and the Dealing with Disruption Stream can access the full item here. Non-Members, please email contact@telco2.net or call +44 (0) 207 247 5003.