Amazon’s Kindle – The Hidden Lesson

by Victor Cheng

Amazon.com’s new digital book device, named Kindle, has just hit the market.

While early reviews on Amazon itself appear fairly negative, there is a hidden lesson here that’s important for any CEO to recognize.

In my book Extreme Revenue Growth, I used Amazon as an example of a company that has done some interesting things, with respect to creating and extending competitive advantages.

While the book goes into a detailed explanation of this important topic, here’s the short version.

In Amazon’s early days, it’s CEO, Jeff Bezos, made a wildly unpopular decision to build physical warehouses.  This was a $300 million investment at a time when Amazon was losing tons of money.  Naturally, investors were not pleased.

But Bezos’s rationale was 1) he didn’t want Amazon to be beholden to it’s primary wholesale supplier book distribution, Ingram, and 2) he wanted to control the end-to-end customer experience; without a fulfillment and distribution infrastructure, he could not do that.

WIthout the warehouses, anybody could put up an online bookstore, use the Ingram catalog for product information, and drop-ship using Ingram as well — and many did.

Amazon built 6 warehoues — the precise number needed to be within 1 – 2 shipping days of every address in the United States.

Many bumps in the road and years later, Amazon now processes a package delivery cost that’s significantly lower than its competitors.  It’s this underlying fulfillment infrastructure that allows Amazon to offer free Super Saver Shipping on orders of $25 or more and free 2-day shipping for Amazon Prime members.

So what’s the big deal?  And what does that have to do with Kindle?

First, competitors could copy Amazon’s free shipping marketing programs, but without the more cost-efficient fulfillment system, competitors cannot copy Amazon’s economics.  In other words, Amazon can offer free shipping and make a profit while 99% of its competitors cannot.

This is a major competitive advantage.

The price of entry to start a competing online bookstore suddenly went up by $300 million.

During this time, Amazon created other “hard to copy” competitive advantages, including the world’s largest database of book/product reviews, a massive library of scanned books that prospective buyers can “flip through” online, and additional product categories.

Whether Kindle succeeds or not is actually irrelevant.

Its greater significance is the message it sends about Amazon’s strategic intentions.

Without question, Bezos is keenly aware of a few important facts:

1) He controls access to tens of millions of customers.

2) He realizes he is NOT in the book, music, or “widget” selling business — he is in the customer experience business.

3) He does not see the nice, neat industry boundaries that everyone else sees.

So, as it relates to Kindle, let’s look at the “first order” effect:

1) Physical book printers and paper suppliers are cut ouf of the book printing and publishing equation.

2) Shipping companies like UPS, long-haul trucking companies, and container shipping companies are also cut out of the equation.

IF Kindle DOES work, at some point, book PUBLISHERS like Random House and Warner Books are at risk of getting cut out.  If Amazon controls all the customers (or enough of them) and has a delivery model that doesn’t really require a traditional publisher, some authors will, at some point, opt to go direct.

IF Kindle DOES NOT work, you can be sure Bezos will try another way to re-define industry boundaries, grab more share of wallet, and pretty much build more “hard to copy” competitive assets.

If you’re in an industry touched by Amazon in any way, shape, or form… this is your wake-up call.

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