This video was sponsored by Skillshare I have a link for you to try them out for free So hang out until the end of this video In 2013, a Silicon Valley startup called June was founded The company was one of the first to develop a smart oven, which could be controlled over Wi-Fi, had a screen for recipes, a camera for checking out your food from anywhere, and eventually integrated with Alexa, so you could control it with your voice And by smart device standards, June Ovens were a success story The company behind them became a market leader and raised four consecutive rounds of funding from investors like Slow Ventures, Eclipse Ventures, and, in 2018, Idea Amazon Alexa Fund, Amazon’s own venture capital division Then just one year later, Amazon launched its own smart oven An oven that would have Wi-Fi connectivity, voice controls using Alexa, but would cost half as much as June’s ovens did The startup suddenly found itself in direct competition with the world’s largest retailer, the owner of the Amazon Alexa platform, and its direct investor, who it has to report to regularly with its own financial information The story of June is almost comical, but it is not a unique one Amazon launches hundreds of products every year, and, over time, has developed a very elaborate playbook for crushing competitors with them So, in the 58th episode of the Story Behind series, I’d like to walk you through that playbook Real quick before we start, if you want to see more in-depth analyses of tech companies, especially from a business perspective, consider subscribing to Tech Altar Step 1 in the playbook is a decision: Who should Amazon crush next? Should they make a smart light bulb, a smart thermostat, or maybe a smart oven? Good decisions are based on data, and Amazon has better data than any company in the world available to them for free They know how many people on their platform search for any given product category They have accurate and historical data about the prices and sales volumes and can see how price-sensitive consumers are in a particular market They see whether customers react to discounts, they see how challenging logistics are for any given category, and they see how concentrated a market is A concentrated market would mean there are a few dominant players that would presumably be expensive to compete against They have this “treasure trove” of data on almost all product categories in the world So they know exactly which ones are ripe for disruption In fact, I bet they actually have bots that go through all the categories and flag promising ones, like smart ovens, automatically for them Once Amazon has picked the right categories, it is then ready to move on to stage 2: Creating the product itself, which more than anything, requires money Money to pay world-class engineers and designers to develop a product, and money to finance the manufacturing or the sourcing of it And Amazon is unique in just how much money they have freely available for this very thing at any given time Its biggest source of free cash flow is its e-commerce business, but not because it is hugely profitable Like most retailers, its margins here are thin, somewhere in the low single digits But unlike most retailers, Amazon has such a dominant position that it can force suppliers to accept terms that are so bad that Amazon actually gets money from customers about 18 days earlier than it has to pay their suppliers They just tell their suppliers that they’ll get their money later on, and they can suck it up if they don’t like it And because suppliers often don’t have much of a choice, Amazon ends up with about 18 days worth of cash from their e-commerce business lying around at any given time Some of their other businesses, especially Amazon Web Services, which half the internet runs on, have also grown to be quite large And those, unlike retail, actually do have fantastic margins, which further add to the giant pile of free cash flow This pile of cash means that, while competitors might have to take loans and pay interest on them or find money in some other expensive way, the cost of capital to Amazon is almost zero, a huge systemic advantage And once they’ve developed their products with all of that cheap capital, it is then time for stage 3: Selling it And I’m not going to surprise anyone here by saying that Amazon, of course, has quite the competitive advantage when it comes to selling stuff See, a competitor, like June, would have to make a tough choice when selling their own products They could either build up their own webshop and sell to consumers directly, where they’d have to maintain the store and constantly buy ads from places, like Google and Facebook, to drive traffic to it, or they could sell on Amazon, where they would have to give Amazon a cut of the transactions and, on top of that, also pay for Amazon ads to be promoted on the platform Either choice would cost June a ton of money, especially when Amazon knows it has leverage, keeps pushing advertising prices up, and has often been caught playing dirty, too Like when a seller discovered that they paid Amazon for the sponsored placement, which Amazon then overlaid with its own cheaper product, anyway Uh.
Yeah That’s Jeff Bezos right there living the thug life 🕶 Anyway, unlike June, Amazon, of course, would have no trouble getting its products listed on the world’s most important online store or getting those products featured on the front page with banners and in other preferential locations for free, which, once again, gives Amazon a huge advantage Now, in order to sell, of course, all products need to have a price, and that takes us to stage 4 in the Amazon playbook And we’ve already discussed how Amazon can get perfect market research, huge R&D budgets, as well as massive sales and marketing advantages for its products essentially for free, while competitors have to pay loads of money for each of these So, of course, Amazon typically has an easy time undercutting competitors on price But, there is more Unlike most startups, and especially unlike most hardware startups, like June, which constantly need to prove that they can, at least theoretically, sell their products at a profit, otherwise, investors will not give them more money for the next financing round, and they’ll go bankrupt Amazon’s products often don’t need to turn a profit Either not right away or, sometimes, not at all For a start, Amazon has deep pockets, can artificially keep prices down until the competition dies out, and then create a monopoly for itself On the top of that, Amazon also often doesn’t think in single products It thinks in ecosystems Selling a Kindle at the loss is fine because Amazon will make up for the loss in revenue from ebooks Selling an Echo at a loss is fine because Amazon will make up for it in Amazon Music subscriptions, Alexa ads, and Amazon Prime purchases And Selling an Alexa-powered smart oven at the loss is fine because its users will get a Prime membership, shop for groceries on Amazon Fresh, and will never switch to Google Assistant at home If it can’t control their appliances Amazon can treat some of its hardware as a customer acquisition tool Selling it cheaper means it brings more people into their ecosystem It’s similar to how Xiaomi often prices their phones at a loss, but then still manages to make money, which I’ve explained in a video you can see somewhere here But beyond that, Amazon can afford low prices for one more very unique reason: They have, over time, uniquely trained their investors to accept low profits Compared to Apple, for example, who has margins hovering between 30 and 50 percent, Amazon’s margins are in the low single digits, and Jeff Bezos has artificially kept them low for decades and has proven for that to be the winning strategy By looking at this chart from Recode, it’s clear that even as Amazon’s sales and free cash flow are increasing at incredible rates, their profits remain almost non-existent That’s because, essentially, every time Amazon has a spare dollar, instead of keeping it as a profit, it spends almost all of it on future growth engines like building new warehouses or developing a new Alexa-powered smart oven With almost any other company, investors would revolt against this I mean, no profits for almost the entire existence of the company? That’s a very clear signal that something is going wrong with the company, right? Except, not with Amazon By proving time and time again that its aggressive bets like AWS, for example, do pay off eventually in a huge fashion, Amazon has convinced its investors that they should prioritize long-term growth over short-term profitability, as well And so, Amazon losing a bit of money on a smart oven to drive competitors like June out of the market while buying up a large and loyal Amazon Fresh grocery shopping user base is exactly the kind of thing investors put their money into Amazon for And that’s the PlayBook With an unfair advantage in access to information, capital and sales channels, plus, strong ecosystem plays like Prime and Alexa as well as a lack of pressure from investors to show short-term profitability, it’s no wonder Amazon is one of the scariest competitors on Earth And while June can’t publicly say that they are scared to death of this new competitor, because that will scared their investors and their consumers, they sure as hell should be scared Now, I always find it understanding what exactly investors want from a company, at any given stage, really helps us understand what companies want And to understand how investors think, I recommend watching these fantastic courses on Skillshare They were made by my former colleague Jordan before he left the Business Casual channel, and they are called “Investment 101” He starts by explaining the basic of stock exchanges and goes all the way into breaking down what metrics real investors use to judge the value of stocks, like those of Amazon, for example It’s the perfect combination of material that is full of information but not overwhelming and you can watch both of these courses, as well as any others from Skillshare’s library of thousands of courses for free for two months by claiming your special free trial at skl.
sh/techaltar14 If you decide to stick around after the trial, it’s a very reasonable ten dollars a month So check them out, and I’ll see you in the next video.