Amazon, take note: too much of a good thing always backfires

Amazon’s growth may be taking a toll on its partners within the ecosystem, smothering innovation from complementary players

PUBLISHED : Friday, 01 September, 2017, 10:32am
UPDATED : Friday, 01 September, 2017, 10:32pm

This week, e-commerce giant Amazon completed its acquisition of Whole Foods, an upscale supermarket chain in the US. Almost immediately, consumers felt the Amazon effect: prices were slashed as much as 43 per cent on the first day.

Once nicknamed the “whole paycheck” for its exorbitant prices, Whole Foods has been transformed overnight and now brings health food to the masses – organic avocados, responsibly farmed salmon, and animal welfare-rated lean ground beef – under its new owner.

Amazon’s CEO Jeff Bezos likes to say: “Your margin is my opportunity.” Amazon built its empire selling books, CDs, and DVDs. Next came video streaming, then the Kindle, and then its audiobook company, Audible. At every turn, Amazon forewent profitability. No wonder, then, that when the Whole Foods acquisition was announced, share prices for Wal-Mart, Kroger, and Costco all plummeted. The New York Times described Amazon as a “new breed of Silicon Valley conglomerates.” An interesting question thus arises: is there any business that Amazon should not invade?

Strategy as ecology

Business academics long ago noticed the parallels between biological ecosystems and business networks. In today’s hyper-connected environment, companies profit not so much by amassing physical assets but by tapping into other people’s resources to deliver their offerings to customers. Uber, Airbnb, and Facebook are just a few of the reigning incarnations.

Being open is more important than being smart. Even Apple couldn’t break Amazon’s stranglehold on the voice-activated speaker market

Bezos understands this all too well. When Amazon was building Alexa, an artificial intelligence assistant similar to Apple’s Siri, the company leveraged others’ creativity to make its own device smarter. Alexa comes baked into Amazon’s Echo Wi-fi speakers but, right from the outset, Bezos made sure it would become an open standard that worked with all other gadgets.

In less than 18 months, Echo has mastered more than 10,000 skills – or certified third-party apps – which include Uber (hailing rides), Mixologist (making cocktails), Domino’s (ordering pizzas), and many more. How many apps does its chief rival, Google Home, have? Thirty, as of December 2016. Being open is more important than being smart. Even Apple couldn’t break Amazon’s stranglehold on the voice-activated speaker market.

When Bezos refers to the “Alexa and Echo ecosystem,” he implies that its success depends as much on Amazon’s engineers as on the vitality of the community – app developers, content providers, and device suppliers. Viewed through this ecosystem perspective, however, one particular foray of Amazon becomes exceedingly baffling: physical bookstores.

But upon visiting any of Amazon’s brick-and-mortar bookshops, one discovers the unusual tweaks. Books, for example, are positioned with the covers exposed, rather than the spines displayed, as is customary in a traditional shop. A black card is placed underneath each book with customer review data pulled from Amazon’s website. There’s also a scanner that displays the deep discount for Amazon Prime members. At the other end is an electronics area reminiscent of an Apple store, dedicated to Echo and other Amazon paraphernalia. The rent can’t be cheap. The one I visited was located at the Time Warner centre in Columbus Circle – some of the most expensive retail estate in New York City.

Amidst the retail wasteland across America, there are still a handful of thriving independent bookstores in large major cities.

The once online pure-play retailer is now forging its ‘physical extensions’ in order to dominate bookselling completely

Since November last year, however, has started to compete directly against them. After some 20 years of relentless assault on Barnes and Noble – and bankrupting Borders in its wake – the once online pure-play retailer is now forging its “physical extensions” in order to dominate bookselling completely.

And yet, independent bookshops are not just remnants of the past. They serve as vanguards of our cultural future, because traditional bookstores allow readers to discover new authors, and authors, likewise, new readers. When I went shopping at the Strand in Union Square in New York City, I was swarmed by fellow readers browsing. The 90-year-old bookstore was as chaotic as a Turkish bazaar: 18 miles of books, stacked right down into the basement.

Keystone species

A business ecosystem, like a natural one, inevitably moves from a random collection of elements to a more structured community. Problems arise when one species spreads its tentacles so wide that it smothers keystone species – those upon which the entire community depends. Once these keystone species die out, the ecosystem collapses.

For online book sales to have a viable future, there must be a vibrant reading community. Yanking out the last few indie bookstores will at most give Amazon a rounding error in profits. But these brick-and-mortars are the nursery of creative writers, providing them with try-outs before they’re categorised by the vast, efficient online algorithm. The offbeat Strand is the “off-Broadway” of the literary world, where the next bestseller is born without the help of heavy promotion by paid publicists or corporate endorsement.

When that 90-year-old bookshop is bankrupted by Amazon, won’t we be left with a cultural and intellectual life that’s monolithic, barren, and impoverished?

Author events and local book clubs may look quaint in the age of Google and Facebook. But that’s exactly how book publishing avoids being conquered by predictive analytics, unlike pop music, which is overrun by Auto-Tune. And why wouldn’t Jeff Bezos prefer distributing books in a publishing world that’s infinitely varied? When that 90-year-old bookshop is bankrupted by Amazon, won’t we be left with a cultural and intellectual life that’s monolithic, barren, and impoverished?

Too much of a good thing always backfires

In 1876, the Philadelphia Centennial Exposition exhibited an aromatic, ornamental vine – kudzu. Displaying it among other horticultural varieties, the Japanese participants planted one to shade their pavilion. With no natural predators in the US, however, the kudzu soon destroyed forests by engulfing trees and blocking sunlight. Ferns and scrubs were uprooted, and great besieged oaks collapsed under the sheer weight. Even when cut down, if not burned, it regrows in landfills.

“Green, mindless, unkillable ghosts,” said poet James Dickey of the mile-a-minute weed that ate the South.

For Amazon, or any executives of a successful business, a key question to consider is whether the growth of an enterprise is already taking a toll on its suppliers, tenants, or other business partners within the ecosystem. In pursuit of higher revenues, are we extracting so much from the eco-space that we smother all innovation from other, complementary players? Nature suggests that too much of a good thing can always backfire.

Howard Yu is professor of strategy and innovation at IMD Business School