One of the best all-time pieces I’ve read on Amazon and the root of its decision making as a company, is Ben Thompson’s, “The Amazon Tax.” Thompson writes one of the most prolific newsletters, Stratechery, which covers the business and strategy side of technology and media through daily updates. Stratechery has been a big source of inspiration for Future Ear, as Ben is incredibly consistent and thoughtful with his analysis and has set the standard for anyone attempting a daily update.
In his, “The Amazon Tax,” piece, Ben mentions Brad Stone’s book, “The Everything Store,” which includes the following excerpt (emphasis mine):
“At the same time, Bezos became enamored with a book called Creation, by Steve Grand, the developer of a 1990s video game called Creatures that allowed players to guide and nurture a seemingly intelligent organism on their computer screens. Grand wrote that his approach to creating intelligent life was to focus on designing simple computational building blocks, called primitives, and then sit back and watch surprising behaviors emerge.
The book…helped to crystallize the debate over the problems with the company’s own infrastructure. If Amazon wanted to stimulate creativity among its developers, it shouldn’t try to guess what kind of services they might want; such guesses would be based on patterns of the past. Instead, it should be creating primitives — the building blocks of computing — and then getting out of the way. In other words, it needed to break its infrastructure down into the smallest, simplest atomic components and allow developers to freely access them with as much flexibility as possible.“
Primitives – the building blocks – are at the core of all of Amazon’s services. Think about how Amazon.com operates from a systematic standpoint. It’s a marketplace facilitated by Amazon, where consumers can purchase goods from merchants directly, or through third party merchants. In North America, the vast majority of the inventory is sent to one of Amazon’s 75 fulfillment centers, which is then received by Amazon, warehoused, packaged and then shipped back out to the consumer. Amazon handles all the major fixed costs – the fulfillment centers and all the costs that go into hosting/managing/maintaining Amazon.com. In other words, Amazon created the primitives required to enable this marketplace to work.
As Ben brilliantly points out, by creating primitives, it allows for Amazon to take a cut, similar to a “tax.” Sure, manufacturers don’t have to sell their goods through Amazon.com and pay the 15% “tax” to Amazon for facilitating the exchange of goods (aka enabling the transaction through the creation of primitives), and some are moving away from Amazon.com, but the bulk of merchants know that Amazon.com represents one of the largest markets and therefore have determined it’s better to pay the, “tax man,” in exchange for tapping into the market.
Ben’s piece was written in in March of 2016, and to just give you an idea of how spot-on his assessment was, look at the way senior executives at Amazon speak today. This is from an interview conducted at the GeekWire Summit in Seattle last week, where Dave Limp, SVP of Devices & Services, spoke about Amazon’s Project Kuiper (emphasis mine):
“So, connectivity is kind of a primitive, first and foremost, but it’s getting close to a human right. If you were writing a new Bill of Rights today, you might put connectivity in it. It’s close to that. [There are] lots of things small companies can do. They’re nimble, they’re in a garage, they can invent super-fast. [But] there are some things that, for bigger companies — it’s on our shoulders to solve. This is an example of one of those.
To solve that connectivity … on a global basis, we’re going to have to put 3,236 satellites up. That’s going to take billions and billions of dollars of capital. And by the way, it’s high risk. We’ve got a lot of invention ahead of us. But I like that we’re willing to take on the responsibility for trying to do that. I think we can also turn it into a good business. That’s not lost on us. But when you can get the overlap of the Venn diagrams of “good businesses” with “greater good,” those are the things you want to work on.”
More than three and a half years after Ben wrote his piece, high-ranking executives at the company are still referring specifically to primitives and why they’re so important to Amazon as a company. If Amazon controls all the massive fixed costs associated with enabling new primitives, it then positions the company to reap the returns to scale, or as Ben described it, “levy a tax.” Take a look around at where Amazon reinvests its revenues into, and you’ll notice that much of where that money is funneling, is toward the next generation of primitives to make Amazon.com, AWS, it’s logistic service, and Alexa that much more valuable and compelling for customers. Satellite-powered connectivity is just another example of the types of primitives that Amazon is building, and as Dave Limp points out:
“If you think about Amazon and what we want to do in the future, we want everybody connected. A, it’s good for society, and B, it also will be good for Amazon. Obviously, more people can shop, which we like, and more people can get access to things like Alexa, and more developers can get access to things like AWS.”
Amazon is one of the few companies that has the resources and stomach to handle the fixed costs associated with generating these types of primitives, whether that be launching satellite constellations into space, building out its fulfillment centers network, the Kiva robots inside the fulfilment centers, or purchasing 100,000 electric vans for its logistics network. Amazon’s focus on primitives has been hugely successful for the company and its services, as building primitives has positioned Amazon to reap massive returns to scale by levying, “The Amazon Tax.”
-Thanks for Reading-
Dave
