When you look at large manufacturing companies, it becomes very clear that the machine that makes the machine is just as important as the machine itself. There’s a lot of work in the iPhone, but there’s also a lot of work in the machine that can manufacture over 200m iPhones in a year. Equally, there’s a lot of work in a Tesla Model 3, but Tesla has yet to build a machine that can manufacture Model 3s efficiently, reliable, quickly and at quality at the scale of the incumbent car industry.
More than any of the other big tech platform companies, Amazon is a machine that makes the machine.
.. Amazon at its core is two platforms – the physical logistics platform and the ecommerce platform. Sitting on top of those, there is radical decentralization.
.. Amazon is hundreds of small, decentralized, atomized teams sitting on top of standardised common internal systems. If Amazon decides that it’s going to do (say) shoes in Germany, it hires half a dozen people from very different backgrounds, maybe with none of them having anything to do with shoes or ecommerce, and it gives them those platforms, with internal transparency of the metrics of every other team, and of course, other people (and Jeff) have internal transparency to their metrics.
These are the famous ‘two pizza teams’. The obvious advantage of a small team is that you can do things quickly within the team, but the structural advantage of them, in Amazon at least (and in theory, at least) is that you can multiply them. You can add new product lines without adding new internal structure or direct reports, and you can add them without meetings and projects and process in the logistics and ecommerce platforms. You don’t (in theory!) need to fly to Seattle and schedule a bunch of meetings to get people to implement support for launching make-up in Italy, or persuade anyone to add things to their roadmap.
This means not so much that products on Amazon are commodities (this much is self-evident) but that product categories on Amazon are commodities.
This model has two obvious consequences for Amazon. The first is that
- it can scale almost indefinitely – if you can launch x in y without a meeting or a new org structure, the speed of expansion into new categories is limited mostly by your ability to hire and to procure (and also by consumers’ willingness to buy a new category online, of course). The second is that
- the buying experience for any given product category ultimately needs to fit a lowest-common-denominator model. The platform teams cannot easily create custom experiences for each new category.
.. There’s a third consequence, though: those atomised teams don’t actually need to work for Amazon. This is the insight behind both AWS,
.. Estimates of the total value of goods being sold both though Amazon itself and through marketplace vendors (together this is termed gross marketplace value, or GMV) are generally about double Amazon’s reported revenue.
.. it now has a 25% operating margin.
.. Amazon invests cash from profitable units into the creation of new, unprofitable units, and you have no real idea what the distribution looks like. This, I think, is how we should see both AWS and the marketplace business: Amazon is uniquely obliged to disclose the profitability of AWS, but it’s not the only profitable part of the company.
.. The opposite extreme might be Apple, which rather than radical decentralization looks more like an ASIC, with everything carefully structured and everyone in their box, which allows Apple to create certain kinds of new product with huge efficiency but makes it pretty hard to add new product lines indefinitely. Steve Jobs was fond of talking about saying ‘no’ to new projects – that’s not a very relevant virtue to Amazon.