Spotlight Questions 2

How big is this business compared to Amazon's other divisions? How big does Amazon think it can get?

AWS is just a single-digit percentage of Amazon's overall revenue, but it is already a multi-billion revenue-generator and the firm's fastest-growing business. Jeff Bezos has stated that he thinks AWS can eventually become as big as Amazon's retail business.

Why did Amazon decide to get into cloud computing? This business is radically different from shipping books and other physical products. Do you think Amazon should continue to keep AWS as part of Amazon.com, or should it spin the firm out as a separate company? What would be the advantages to either approach?

AWS is now responsible for the majority of the firm's profits. The benefits of having an entire skilled division of technicians creating reliable, standard platforms that Amazon can then use itself (instead of buying these services from others) is also seen as a key benefit. I don't see a point in creating a subsidiary, as Amazon would just need to pay the new business for access in that case.

What do firms gain by using a cloud provider and what do they give up? How might Amazon or other cloud firms reduce concerns potential and existing clients might have? If there are alternatives available, why would firms that compete with Amazon in some businesses use Amazon anyway?

AWS powers hundreds of businesses. It's Amazon services that allowed thirteen guys to scale Instagram to tens of millions of users and a billion dollar acquisition price in just fifteen months. And firms that might consider Amazon as a rival, include Netflix and Dropbox, rely on AWS, as well. Advantages of using the could include allowing organizations to rent server capacity as needed - scaling up during high demand periods or intensive but short-term projects, without having to over-invest in hardware, software, and personnel.

What is AWS and what services are provided?

AWS stands for Amazon web services. It allows customers to rent industry-strength computing on an as-needed basis. Amazon's EC2 (Elastic Computing Cloud), which provides the virtual equivalent of physical computing hardware. But AWS provides dozens of service offerings, including various operating systems, database products, enterprise software, programming 6 environments, networking services, security, artificial intelligence and machine learning tools, and more.

Amazon's unique customer data have allowed the firm to enter the advertising business. Which firms does this bring Amazon into competition with? How is scale important to Amazon? What advantages does scale offer Amazon over its smaller rivals?

Amazon is now in competition with Walmart, Target, and Google. The scale of Amazon's business provides the firm with negotiating leverage to secure lower prices and longer payment terms. Amazon's sales volume scale enables it to operate with thin margins and low prices. Due to amazon being spread over many business it can "hold its breath longer" in a price war.

Amazon prices Kindle hardware at or below cost. Consider Apple's margins on iPad hardware. How does Amazon make money from the Kindle? Which firm do you think will win the battle for tablet computing? Is it the same firm you think will win the battle for e-readers? Do you think there should be one winner? Why or why not?

Amazon makes money by selling ebooks, and learning customer preferences. This allows amazon to recommend to other consumers and it increases perceived value. For Apple. they already have good market position and are largely known for their tablet devices and connectivity with other Apple products. There should not be a winner because there are e-reader apps so essentially all tablets are e-readers.

How do Amazon warehouse staff know where to find items? How does technology help make the process most efficient?

Amazon staff known as warehouse pickers are in charge of building people's order from a warehouse inventory. Wireless devices give pickers instructions on precisely where to navigate to and what items to grab within the maze of numbered isles and shelves. Pickers scan shelf codes after they get each item, and the device prompts them with their next marching orders. Warehouse software plots that picking path to minimize worker steps and maximize order fulfillment efficiency.

Does Amazon buy most of its warehouse automation software from others or is most of the software written in-house? Why do you suppose this is the case? In what other ways do Amazon's information systems reduce errors? Why is error reduction so critical to firm performance?

Amazon warehouse are powered by at least as much code as the firm's website - nearly all of its home-grown. This allows for Amazon to address issues in their own systems without reaching out going to a third-party source. Workers examine incoming shipments for errors. When they find one they flip on a red light, then a problem solver will deal with the issue.

How does Amazon keep management focused on customer issues and "putting the customer first"?

Amazon's moves are largely motivated by one thing - relentless customer focus. In meetings, Jeff Bezos is known to insist that one seat be left open at the conference table as a symbol representing "the most important person in the room," the Amazon customer. To keep even the most senior executives empathetic to the customer experience, every two years every employee, from Bezos on down, must spend two days on the service desk answering customer calls.

Although Amazon is investing in robotics, human beings still do most of the product picking. How does Amazon ensure customer privacy is protected despite heavy human involvement? Do you think it needs to go to such great lengths? Why or why not?

Amazon's systems only stamp names and addresses on boxes after orders are complete and boxes are sealed. No floor workers know who the customers are or what they have ordered. Yes, I believe it does because it protects brand reputation by providing a reliable and timely service.

What is channel conflict and how has Amazon been subject to channel conflict?

Channel conflict exists when a firm's potential partners see that firm as a threat. Amazon has become a victim of channel conflict when other retailers have dropped its offerings. For example, Barnes & Noble and other book retailers have refused to carry titles from Amazon's publishing arm.

Besides network effects, what additional benefits does Amazon gain by allowing other retailers to sell potentially competing products on Amazon?

Competition among sellers reinforces low-pricing, and attracts customers. Even if a rival wins a sale, all products sold through Amazon they still collect a fee.

Describe how Amazon Marketplace offers two-sided network effects.

Marketplace allows Amazon to build a long tail of product offerings without the costly risk of having to take ownership of unproven or slow-moving inventory, while the firm gets fat and happy in the middle of a two-sided network effect (i.e. more buyers attract more sellers, and more sellers attract more buyer). Some Marketplace products compete directly 4 Amazon's own offerings, but the firm doesn't shy away from allowing competitive listings, new or used, even if they're cheaper.

How have robots changed the way Amazon warehouses operate? What are the benefits these robots bring to Amazon? Which firm supplies Amazon's shelving robots and why might this be important for Amazon?

The Kiva robots used by Amazon are supplied by Kiva Systems. The use of these robots allows Kiva-equipped warehouse shelves to be slotted closer together and allow for rapid, never-colliding, constant round-trips. This helps Amazon store as much as 50% more product in those Kiva-equipped warehouses, which means greater selection at lower cost. It has also reduced unload time for inbound inventory.

What is the long tail? How does the long tail change retail economics? How does it influence shoppers' choice of where to look for products? What firms, other than Amazon, are taking advantage of the long tail in their industries?

The Long tail is an event where firms can make money by offering a near-limitless selection. Customers are more likely to look for products at firms that offer a greater selection rather than at a store that offers the most common items. Netflix is a firm that takes advantage of the Long Tail by offering customers a wide and sometimes obscure selection of movies, not just the blockbusters.

Both Amazon and Apple would like you to store books, music, and other media in their "cloud." What critical key strategic advantage comes to a firm when consumers adopt one firm's cloud vs. the other?

The firm whose cloud is chosen has access to the kinds of books, music, and other media that the consumer likes. This allows the firm to target its advertising efforts accordingly. Moreover, the format in which the media files are stored in one cloud makes it difficult for the consumers to assess the files from the competitor's cloud.

When you walk into a conventional retailer, similar items are stacked next to each other. But Amazon tries not to do this in its warehouse. Why?

This concept is known as "Random Stow," and is done to reduces the chances that a picker will confuse a size or color or otherwise grab the wrong thing. Reducing mistakes keeps customers happy in brand-building ways, and it reduces errors that can crush profits. This also allows robots to fill multiple orders simultaneously.

Roughly how big is Amazon's existing "media" business? What is happening to much of the physical media business?

While Amazon has build solid advantages by selling a broad array of products, media (books, music, and video) represents over one-third of the firm's revenue, and nearly all of that business is going to shift from atoms to bits, shipped not in physical packaging, but through the Internet.

What operating system do Fire devices use? How does this impact the firm's network effects from complementary products? Why do you suppose Amazon's Fire Phone struggled in its first iteration? Do you think Amazon will ever be successful in Phones? Why not, or what will it take to be successful?

While Fire OS is based on Android, it's different enough that it only runs a subset of apps. At launch Fire TV had just 180 apps in total; during the same period the comparably priced Roku offered 1,200 apps. Missing from Fire TV at launch were apps for several popular services, including HBO Go and Spotify.They potentially could considering the wide reach of Amazon, but again there are so many competitors that already have a good market position. They would need greater technological functionality to be successful.

Are network effects at work in cloud platforms? How so? What kinds of complementary products might make AWS seem more attractive than a new cloud computing effort?

Yes, network effects are at work in cloud platforms. Amazon's Marketplace allows it to build long tail of product offerings without costly risk of having to take ownership of unproven or slow-moving inventory, while the firm gets fat and happy in the middle of a two-sided network effect (i.e. more buyers attract more sellers, and more sellers attract more buyers.