Thursday, February 12, 2009

Amazon's experiment with business model

An article in McKinsey Quarterly mentions De-bundling of Production from Delivery. It has been proclaimed as one of the main technology trends going forward. Here is the link. The logic is simple - it helps companies to utilize their fixed assets better by segregating and distributing its capacity better. Amazon has had a great reputation as far as innovation is concerned. Jeff Bezos (amidst all the cynicism from industry pundits and investors) showed a great example of De-bundling by opening up its computing power and storage capacity to be used by other small businesses who cannot afford astronomical cost of monolithic assets. This is not the first time that Amazon faces flak about doing some thing different. Earlier when Amazon opened its 20 distribution centers and logistics services to other companies, investors were worried that the focus is shifting from the core business and then it was Kindle - the ebook reader from Amazon. In this post Seth Godin captures the cynicism about Kindle beautifully.

Like most computer networks, Amazon's uses as little as 10% of its capacity at any one time just to leave room for occasional spikes. Rest of the time this capacity is idle. It only makes sense that some thing should be done with these capacities. Look at it in a way that these excess capacities built in are just like waste until unless utilized. They are like the excess capacities built in the car. If some data is gathered about capacity utilization of personal cars, it would show almost the same numbers i.e around 10%. The rest of the time that capacity is going waste.

And why there will be customers for such service? Simply because the marginal cost of using such resources is less for them using this model. The customers will be able to get their websites online at much lesser cost and much more quickly. This service will in fact will fructify many more start-ups which can do which was not possible economically earlier. There are many examples, one of them being SmugMug Inc which plans to save $500,000 annually by using Amazon servers for storage.

Though to start with the revenues from this operation are small, this service is surely going to pay in the long run. Ya, I get this whole logic that computing and storage will become cheaper, but the trend might not continue as we move to quantum levels of miniaturization.

I like the statement by Jeff Bezos - "We are willing to go down a bunch of dark passageways and occasionally we will find some thing that really works". And as the recent results amidst all the recessions fear show, it does work out for Amazon. It has come out with impressive results crushing street expectations. Here is the link. Well these results might not be related to this particular practice by Amazon, surely it does reflect previous innovations which are paying off right now..

I hope Amazon keeps innovating and surprising all of us and changing paradigms time and again.It has done it with online retail, with Kindle and now with De-bundling. Amazon has faced lots of controversies and have proved all cynics wrong in the past and recently so with Kindle. Which brings us to another important point :-

Some times the market may not see the value of the change you want to bring in the system. I had a dialogue with Seth Godin himself
(over email of course) and this is what he said:

yes, that's exactly it
great marketers persist or work with their story and their market and get through to them eventually.
Take a look at "Crossing the Chasm" a great book on the topic..."

1 comment:

US said...

I am not surprised that Seth recommends persistence after writing "The Dip". But it is still a choice to ride the dip.

Anyway from the McKinsey article
"Putting more science into management" and "Making businesses from information" are logical progressions in tough times. Part of a longer list of items which cannot be ignored any longer.

Amazon's big ticket innovations MechaTurk, Window Shop, Kindle, S3, EC2, etc. are amazing.

p.s. I was shocked at the revelation that publishers charge Amazon same retail price for Kindle books which they sell for $9.99 each. What a pain! Authors should protest, these type of things will prevent Kindle from gaining wider acceptance.