Lockdown reading – Bezonomics

One company that has done very well out of COVID is Amazon (see share price chart below). The wealth of its founder Jeff Bezos soared, and he has seemed untouchable as the richest man in the world, although he has just lost that title to Elon Musk, possibly only temporarily. Bezos is obviously an exceptional entrepreneur, but I never realised just how exceptional until I read Brian Dumaine’s Bezonomics, which I finished reading today, during the Greater Brisbane Lockdown. As other reviewers have suggested, Bezonomics is hagiographic about Bezos, but it clearly shows how he’s always had a long-term vision of global domination of multiple markets, and how he’s been extraordinarily successful in achieving his objectives so far.

Amazon takes advantage of what Dumaine calls the “AI flywheel” (borrowing from Jim Collins), whereby Amazon gets to know its customers better as it gathers more data on them and is then able to offer them better targeted products they are more likely to buy, meaning larger sales volumes and economies of scale, driving down prices, and encouraging further purchases. In the context of the development of Alexa in 2011, Dumaine explains the basics of the AI flywheel on p. 226:

…start with the customer first, find ways to drive down costs, which frees capital to invest in more features, which attracts more customers, which allows for economies of scale to drive down costs, and so on…

Bezonomics explains how Amazon pushes its customers into Prime membership and how Prime has forced Amazon to become super-efficient in warehousing and distribution, so it is now a threat to traditional logistics giants such as FedEx. The book also highlights Amazon’s large market share in cloud services through Amazon Web Services (AWS), which NYU Marketing Professor Scott Galloway has predicted Amazon will spin off this year as a way of appeasing US regulators who may be contemplating antitrust action against Amazon (check out this WebProNews story).

Dumaine argues Amazon is moving into new industries such as healthcare and its AI flywheel will help it quickly gain large market share. Bezonomics speculates Amazon won’t just be in the pharmaceuticals sales business, but in telemedicine as well, via its Alexa devices. On p. 230, Dumaine writes about the potential for a Prime Health service:

Feeling down in the dumps? Alexa might suggest that the [Prime Health] member contact their doctor. (Amazon has filed a patent for Alexa to pick up the sound of sniffles or a cough, and Alexa already offers simple first-aid advice.) When the member asks Alexa to set up an appointment with an Amazon-recommended doctor (five stars!), a time and day is downloaded to his or her calendar. At the appointed time, a doctor pops up on the screen and conducts the exam.

You can see where this is going. The consultation could result in pharmaceutical products being purchased via Amazon. Genius, and all part of Bezos’s plan for global whole-of-economy domination.

In the end, Dumaine does not see a need for antitrust action against Amazon (e.g. forcing a breakup of Amazon into different businesses, and at least separating the selling platform from Amazon’s own retail business, as Senator Elizabeth Warren has suggested). This is even though Bezonomics does highlight some pretty sketchy practices of Amazon, including aggressively competing against independent sellers on the platform with its own line of products. Dumaine accepts Amazon’s assurance it is not using confidential data on independent sellers, and he rejects antitrust action against Amazon, as he sees Amazon ultimately as a force for good for consumers, providing a wider range of products at lower prices than otherwise.

Here I should note that the European Commission has a different view on Amazon’s use of independent sellers’ data, as announced on 10 November last year, in a press release:

The European Commission has informed Amazon of its preliminary view that it has breached EU antitrust rules by distorting competition in online retail markets. The Commission takes issue with Amazon systematically relying on non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon’s own retail business, which directly competes with those third party sellers.

The Commission also opened a second formal antitrust investigation into the possible preferential treatment of Amazon’s own retail offers and those of marketplace sellers that use Amazon’s logistics and delivery services.

Let’s see what happens in the US under the Biden administration, as I wouldn’t be surprised if we see some aggressive action there, although Bezos’s ownership of the Washington Post may provide some protection.

Bezonomics may be too uncritical of Amazon and Bezos, but it’s very worthwhile reading nonetheless. It opened my eyes to the scope and scale of Bezos’s ambition, and the chance that he may well realise it.

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