Amazon has been a master of creating new products and customer experiences while disrupting many product categories, business models, and entire industries. It provides numerous examples of growth and monetization strategies that can provide helpful insights for entrepreneurs and executives seeking rapid expansion and dominant category leadership positions.
Over the course of four in-depth articles, Disruption Amazon Style: Learning from the Masters, I’ve examined Amazon’s growth strategies through the lens of the Grey Heron’s Four Values Framework. As we saw in Part 1, Amazon has excelled at vertical and horizontal integration. In Part II we examined how Amazon has used Value Creation techniques to bring out entirely new offerings such as Amazon Prime memberships and the Alexa-powered Echo smart speaker line of products.
In this Part 3 article, I’ll look at the third strategy of the Four Values Framework – Value Migration – via examples of Amazon Web Services (AWS) cloud offerings and Amazon’s rapidly expanding entertainment and media initiatives.
Two Examples of Amazon’s “Value Migration” Strategies
In addition to using Value Creation to create new offerings in new categories, Amazon has been extremely successful at Value Migration. In this case, they’ve leveraged their expertise, systems, technology and other core elements of the company to get into adjacent markets. Two great examples are Amazon Web Services’ (AWS) cloud solutions and Prime’s Music and video offerings in the entertainment space.
1. Amazon Web Services: The Largest Cloud Offering on the Planet
Amazon started selling books online and then expanded horizontally to offer many product lines. They honed their e-commerce, ordering, payment, and IT systems for holiday shopping and peak demands. Then they leveraged their expertise to offer an e-commerce platform that could be used by other merchants. That resulted in Amazon MarketPlace which now sells over $100 billion dollars of third party merchandise.
Based on the expertise they had developed around large, highly scalable, distributed computing systems and communications infrastructure, they migrated into the Cloud sector as that trend was gaining traction. Now, their Amazon Web Services (AWS) makes them the largest Cloud vendor in the world with over $18B in revenues – bigger than Google, Microsoft and IBM – the tech companies you’d expect to dominate this space. AWS also accounts for the bulk of Amazon’s profits. This is a textbook example of migrating into an entirely new category/industry.
Not only do they offer raw computing power, they have now filled out their offerings with a number of layers in the IT stack. They provide developer tools, databases, BI analytics, virtualization, specialized Artificial Intelligence services and hardware. They also offer multiple tools for IoT development, data ingestion, and analysis. They are continuing to grow rapidly to ride the wave of Cloud adoption while seeding future growth in AI and IoT, two of the hottest technology areas.
In essence, Amazon’s Value Migration strategy leveraged their e-commerce systems and experience to establish them as the largest cloud provider and position them in the $3.5 trillion Information Technology (IT) sector. Who knew an online bookseller would grow into an adjacent sector and become a major IT player.
Going forward, you can expect to see many more offerings from Amazon in a number of related areas. At their November 2017 re:Invent conference, they announced a slew of new offerings. These highlight how much Amazon is investing in these developing markets to ensure they can be a dominant supplier.
- AWS 1-Click for configuration
- AWS IoT Device Management
- AWS IoT Device Defender for security
- AWS IoT analytics for data analysis and manipulation
- AWS Quicksight for creating dashboards and visualizations
- Amazon FreeRTOS an operating system for small microcontrollers and devices
For AI, Machine Learning, and Computer Vision:
- Amazon Rekognition for tracking people in real-time
- Amazon Athena and Quicksight to assess facial attributes like age, gender, emotional state
- Amazon Comprehend to identify sentiments as well as people, places, and phrases
- Amazon Transcribe to convert audio files to text
- Amazon Translate for translation
- Amazon Sagemaker for developing machine learning
- Amazon Greengrass for deploying machine learning at the “edge”
- Amazon Sumerian enabling developers to build VR, AR, and 3D applications
- Graphics processing units (GPUs) on demand in AWS for machine-learning intensive workloads;
- A $250 HD camera with AI built-in
In addition to these offerings, they are also offering Alexa for Business. Not only are they creating special pricing for Business Prime e.g., 10 memberships for a discounted price of $49/year each, but they are also offering an array of business services:
- Amazon Chime for web conferencing
- Amazon Connect, call center software for support and service personnel
- Amazon WorkDocs for file collaboration and management
- Amazon WorkMail for business email and calendaring
- Alexa skills for scheduling conference rooms and initiating calls
- Links to major enterprise apps like Salesforce, Splunk and Concur
- Third-party integrations with SAP, SuccessFactors, MS Exchange; Ring Central and others
Expect to see a lot more from Amazon as these offerings are fleshed out in the coming years. With this Value Migration strategy, Amazon has “landed” and is well entrenched in this adjacent market. Now it is “expanding” horizontally and deepening vertically to defend this area from Google, Microsoft, and other challengers.
Implications for Tech Marketers
Amazon learned that its e-commerce systems were some of the best use cases for IT. It understood the issues of large data centers, peak demands, scalability, distributed workloads, security, payment systems, etc. It was its own best and most demanding customer. That allowed it to build out cloud offerings that exceeded the needs of the most demanding external customers. This is similar to the early days of Hewlett Packard when engineers built products for other engineers in what they called the “next bench syndrome.” Being your own customer forces you to build better products.
Amazon has also been persistent in driving down prices and offering more value to customers in a race to stay ahead of the Cloud computing cost curve. Given their scale, they have been able to lead the pack and drive other companies out of the public cloud market (HP, IBM, and many others).
AWS is a perfect example of Value Migration into an adjacent space – leveraging existing strengths to get into an entirely new market. It also builds on the four principles that guide much of Amazon’s growth strategy:
- Obsessive focus on customers to provide great value
- Dedication to operational excellence and improving efficiencies
- Willingness to take risk inventing new offerings
- Long-term vision, not limited by short-term goals
2. Amazon Prime Entertainment: Music, Video & TV Powers an Ever-Expanding Empire
In addition to the major Value Migration strategy embodied in AWS, Amazon has been able to extend its reach into another completely different adjacent sector. Starting out selling books and moving into digital books afforded them the opportunity to migrate into adjacent areas of entertainment.
At first, these moves looked like “baby steps,” starting with audio books, then to Amazon Music, which leveraged millions of songs in existing catalogs though deals with major music labels. A year ago, Amazon entered the music-streaming services market. Today Midia Research estimates Amazon’s weekly listening is second highest of all the paid services behind Spotify and ahead of Apple Music. Amazon is third largest in terms of subscribers behind Spotify and Apple Music.
Amazon was then able to expand into other types of entertainment that could be distributed digitally over their networks. They moved into video with films and TV shows – again replicating the music sector by negotiating deals for existing catalogs from the major suppliers.
Now Amazon is at the point where it is commissioning new content. They are expected to spend $4.5 billion dollars on video content in 2017 and are working on dozens of original movies and TV shows. This puts them in the realm of Comcast and Netflix’s $6 billion spending for content. Hollywood studios are taking notice as Amazon is bidding up the prices on new shows and disrupting the industry. Some forecasts show Amazon spending in 2022 surpassing Netflix with $8 billion vs. $7 billion, while Apple may spend about $4 billion.
And it doesn’t stop there. Amazon also bought Twitch in 2014 which is the leader in broadcasting gaming. Twitch is now moving into sports broadcasting exploring new deals with various sports franchises including the NBA. Although they paid $970 million, they now have a whole new fast-growing offering for the gaming community. These new audiences can also provide a Flywheel effect to increase Amazon’s 70-80 million prime members for more e-commerce sales.
Now that Amazon has a strong foundation in the entertainment industry they are extending their reach even further. In Europe, they offer Amazon Channels which offer assorted live TV channels to compete with broadcast.
Although Amazon earns a little over $1 billion in advertising now, analysts forecast that figure to reach $5 billion in 2018. Expect them to accelerate their ad network growth to start competing with Google and Facebook as they tap into the $83 billion US Digital Ad market. They know what people watch, what they buy, when they shop, for what they shop, where they live, how much they pay for ordered items, what payment systems they use and much more. Amazon can use this treasure trove of profile data to provide incredibly rich targeting information for advertisers that other companies may be hard-pressed to match.
This also helps to explain why Google is partnering with Walmart and Target in order to get richer data as well as monetize their value via e-commerce partnerships that compete with Amazon. Competing on ad revenue is tough when Amazon can monetize by sales of physical items with much higher revenues.
As Amazon opens its arms to embrace the entire entertainment ecosystem it needs to include third-party offerings – not only its own. Just as it enticed millions of merchants onto its e-commerce platform with Amazon Marketplaces, it is now doing the same in the entertainment area. Amazon just announced December 1, 2017, that in addition to Netflix, Alexa would also support Hulu, CBS, NBC, Showtime, Bravo and Sony PlayStation Vue apps running on Amazon Firesticks and Fire TVs. Expect Alexa’s natural language, AI-backed, voice-enabled interface to compete as an umbrella platform for interacting with all sorts of entertainment programming and systems.
It’s also interesting to note that Disney has renewed its contract with AWS for storing and streaming some of its content. Disney is building out its own channels for streaming since breaking off their relationship with Netflix. The fact that Disney has chosen to use Amazon for streaming capabilities highlights the scale and reliability of Amazon’s AWS services.
Building e-commerce systems helped make AWS a powerful computing platform. Building their Prime Video and Music streaming out on AWS also increased their economies of scale so that it is an ideal platform for any company streaming content –even the largest entertainment companies in the world like Disney. Interestingly, Disney just announced their intent to buy various Fox assets that will give them new content as well as access to the Hulu streaming capability. That will clearly put them into a competitive position with Amazon in the direct-to-consumer content streaming sector.
Implications for Tech Marketers
You can see in these examples how Amazon has exploited its strengths in computing and e-commerce to jump into the adjacent multibillion-dollar markets of IT and Entertainment.
There are also other related products that provide even more leverage: Amazon Firesticks to help stream their content to TVs, Kindle Fire Tablets that are actually low-cost Android tablets to help viewers consume music, books, movies, TV, and Alexa with an AI backend to make all of these offerings easily accessible through voice commands on phones and many other devices.
Amazon has done a masterful job in leveraging its assets and strengths which provide great examples that any growing company should consider:
- Leverage ecosystems, platforms, third-party partnerships
- Build on company strengths to provide new offerings to satisfy customers in new markets
- Leverage electronic distribution to disrupt industries
- Start with the basics, flesh out offerings, expand vertically and horizontally
- Provide great customer value at low cost
- Partner with third parties for credibility, scale, and distribution
- Build out ecosystems and utilize a “land and expand” strategy
- Emphasize differentiators to solidify your position
Chris Kocher is a co-founder of Grey Heron, a management and strategic marketing consulting firm. He has 30 years in both strategic and hands-on operating experience helping executives and investors build revenues and shareholder value. He has consulted with over 130 companies on innovating with new business models, product strategies and monetization. Chris has held management positions at HP and Symantec in addition to advisory roles at startups. He has worked extensively on monetization, SAAS, IoT, ecosystems, partnerships and accelerating growth in new business initiatives. Email him at firstname.lastname@example.org or follow him on LinkedIn.
* The Four Values Framework (4Vs) ™ is a structured approach to developing new growth and monetization strategies developed by Grey Heron Venture Consulting. It has been used with multiple companies to identify Vertical and Horizontal integration approaches, new Value Creation areas, Value Migration into new markets and product categories as well as building complete Value Delivery Systems to ensure strategic alignment.