Transformation from e-commerce to nested platform reveals Amazon's trillion way of evolution


Transformation from e-commerce to nested platform reveals Amazon's trillion way of evolution

 

Author: Chen Yongwei

On Sept. 4, Amazon's shares rose to $2,050.27 a share, pushing the company's market capitalization above the trillion dollar mark. Although Apple's market capitalisation was the first to exceed $1 trillion on August 2, Amazon was only second in history. But if you look back on history, it's not that simple: Apple took 38 years to go public and trillions to break, while Amazon did it in 21 years.

So what is the force that supports Amazon's rapid growth? There are many related factors, and the positive use of platform thinking is one of the most important ones. Many scholars believe that Amazon is just a commercial enterprise, its profit model is to rely on the pipeline of buy and sell to make a difference. This is obviously a serious misunderstanding. In fact, while Amazon was indeed a pipeline company in its early days, it has now developed into a large Nested Plat-form. Note: I was listening to Elstein, author of Platform Revolution, in a conversation. I haven't seen anything like that in other books or articles, and I think it should be his original, or platform. On this platform, there are many sub platforms, such as electric business, cloud computing, logistics, advertising and so on. It is step by step from the pipeline enterprise to platform enterprise, and then to nested platform, so that Amazon cast today's powerful.

Using platform thinking to help pipeline business grow

Although Amazon is now a giant, its history begins in a small garage. In 1994, Jeff Bezos, keenly aware of the potential business opportunities of e-commerce, decided to quit his job on Wall Street and start a business in his garage. Despite the evidence that Bezos started his business with the idea of building the Everything Shop so that consumers could buy everything they wanted on his website, he chose the niche book market as his entry point.

In the United States, the total size of the book market is considerable: it was estimated that in 1994 the size of the book market in the United States was about $19 billion, with an average annual expenditure of $79 per American on books. At the same time, such a huge market has not been monopolized by monopolies. Although there were two big chain bookstores in the United States, Barnes & Noble and Borders, their market share was less than 25%, and the rest was scattered among independent small bookstores. So if you choose to enter the market, you will not encounter too many people in the block. With these in mind, Bezos focused on Amazon's original business on books.

From today's perspective, Amazon started out selling very primitively: it mainly receives orders by mail, orders from book wholesalers, and then sends books to readers via the postal system. From the point of view of value chain, this is the same as traditional bookstore. But because the Web has broken the boundaries of regional markets, Amazon has acquired greater demand than any traditional bookstore, and these needs have successfully sustained its initial growth.

Through initial operations, Bezos and his team found that consumers were more likely to complete the transaction on the site than on email. In order to adapt to this preference of consumers, Amazon website was launched in July 1995. The move was well received by consumers, with daily turnover reaching $12,000 a week after launch and $15,000 the next week.

Amazon's success has given some of its old bookstores a glimpse of the value of the Web and is starting to test e-commerce. In 1996, bodes also launched its own website and started selling books online. As one of the two giants of traditional chain bookstores, Bodes has more advantages than Amazon in terms of brand, channel, capital and so on. How should Amazon cope with such a challenger? The Bezos team has come up with a platform-thinking approach: a review board that encourages readers to evaluate the books they buy, and channels that allow authors to communicate widely with readers, readers and readers. In this way, Amazon's website is not just a purely book-buying site, but an interactive community of book lovers and writers. We know that communities have strong network externalities, and once they form a scale, they have a strong attraction. By building this "community," Amazon succeeded in holding its readers back from Bodes'attacks.

From pipeline to platform

Although the use of online thinking helped Amazon grow early, competitors quickly learned these "routines". As traditional bookstores have entered the field of electronic commerce, Amazon is under increasing pressure. Amazon has had to compete with competitors in price wars to preserve its market, and as a result, its profitability has been slow to improve while sales are rising.

To get rid of this dilemma, Amazon began to expand its business and sell goods outside books. At first, Amazon still chose its own mode, buying and selling itself. In order to match sales, Amazon also began to build its own warehousing and logistics system. The problem with this model, however, soon became apparent: Amazon had limited financial resources, so it was difficult to provide consumers with a sufficient range of goods, which limited its appeal. Buying more goods is certainly a viable option, but the warehousing and logistics costs are clearly unaffordable to Amazon.

Then, how can we break this deadlock? One idea is to change the business model from pipeline to platform, allowing merchants to enter Amazon to sell goods. In 1999, Amazon turned this vision into reality. It has opened its website to businesses and self-employed businesses, allowing them to sell goods on them. Amazon charges monthly fees and deductions for businesses that trade more frequently, but only deductions for businesses and individuals with less frequent transactions. When the merchants make a deal on Amazon, they send the goods to their customers, and Amazon charges them to the buyers and remits the deductions to their accounts.

Amazon's move has been welcomed by small businesses, allowing them to rely on Amazon's reputation and channels to let more consumers see their products. As a result, a large number of merchants concentrated on the Amazon platform. Amazon, for its part, has a bigger payoff than these small businesses: that means it has successfully solved the problem of fewer commodities, making the entire Amazon more attractive, more attractive to consumers, and more profitable for its own business. More importantly, this consumer development strategy not only costs a small amount, but also generates considerable monthly fees and royalties.

It needs to be pointed out that the Internet bubble burst in 2000, and e-commerce businesses including Amazon have been hit hard. Financing has become very difficult. In this case, the platform reform program introduced in 1999 guaranteed Amazon's revenue and profitability, making it free from the dilemma of capital chain fragmentation in the face of huge shocks. In this sense, platform reform is in some sense the rescue of Amazon at the time of crisis.

From platform to nested platform

With the platform strategy, Amazon not only survived the cold winter of the Internet economy, but also rapidly grew into a real "shop of everything".

However, as e-commerce business thrives, some problems are beginning to emerge. An important problem is the serious waste of IT resources. As an e-commerce platform, Amazon's transactions are carried out on the website. In order to ensure the smooth operation of the transaction, a large amount of IT resources must be invested as support. Because the distribution of e-commerce users in space and time is not uniform, in order to ensure the stability of the user shopping experience, its IT architecture must be established according to peak sales value. But this poses a problem, that is, most of the time, there will be plenty of resources left idle.

How can we make effective use of this idle IT resource? Amazon has taken a very creative approach by using these idle IT resources to serve its customers. This is the AWS cloud service that we became familiar with later (AWS full text is Amazon Web Service, or Amazon Web Service).

We know that a large number of small and medium-sized enterprises have a great demand for IT hardware and software, but due to cost constraints, it is difficult for them to build a complete software and hardware system. Against this background, the emergence of cloud services has brought some gospel to these enterprises.

Generally speaking, cloud services can be divided into three categories: Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS). Among them, IaaS services are similar to hardware outsourcing, i.e. storage and hardware usage on service providers'machines; PaaS mainly provides various solutions for developing and distributing applications on the Internet, such as virtual servers and operating systems; and SaaS mainly provides software applications on the Internet. Software vendors provide services to customers on hardware vendors'machines, and in the process, hardware vendors play a platform role. On this platform, software providers interact with customers, while hardware providers benefit from their transactions.

Initially, Amazon opened up cloud services to consumers just to solve the problem of IT resource waste. But Bezos et al. quickly found that cloud services themselves can generate huge profits --- even more than e-commerce. As a result, the AWS cloud service was quickly isolated and developed as a separate business.

However, fixed investment in cloud services is very demanding, requiring not only a large amount of hardware construction, but also a number of technical cooperation partners to start the platform's "network externalities". Where does the money come from? In this process, the electricity supplier business plays a role as a blood donor. By investing the profits from e-commerce into cloud services, AWS cloud services quickly developed and became a new source of profit streams. Amazon's main competitor, Microsoft CEO Satir NADELLA, said "Amazon can lead Microsoft in the cloud service sector, because it has a bilateral market and can be subsidized by other businesses". Nadella's remarks also support Amazon's application of platform thinking when developing cloud business.

With the development of AWS cloud services business, we can see that Amazon is actually doing a "split in two" work. It dismantling a business component that supports an e-commerce platform.


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