The future of networking is being defined literally as we speak, but not by the companies who’d like to define it, or even the ones we’d think would be doing the defining. We’re seeing a passing of innovation from the traditional network players to the OTT players, and from traditional network vendors to a collection of software types, some of which work for OTTs and others of which work for nobody anyone has ever heard of.
One company that everyone has heard of and that’s increasingly driving the revolution is Amazon. In the news recently with its Prime music service, Amazon has been a kind of universal spoiler, a company who has managed to step on a lot of other people’s dreams. Now, in the edge of their possible entry into the smartphone space, we have to ask “What is it that makes them so powerful?” Are their people more insightful, smarter? What could it be? I think Amazon has a lot of smart, insightful people but so do others. Their secret lies in positioning and simple business metrics.
In a race to the bottom, a world of commoditization, the guy with the lowest internal rate of return (IRR) will always win. Generally speaking a company can invest profitably above its IRR, so a low IRR means that projects that would be ROI poison for others could be a profit haven for you. Public utilities or former ones, like the network operators, have historically low IRRs and so they fit this happy model. Amazon, as a mass-market retailer, also has a low IRR. Cisco, Apple, Google…all the competitors that seem to have at least as much glamour as Amazon or more…have higher IRRs. They fight Amazon with one financial arm tied behind their back.
But if common carriers also have low IRRs, then what distinguishes them from Amazon? The answer is that Amazon has a tech culture bred on efficiency while the operators have one bred on guaranteed rate of return. Amazon learned early on that to be profitable they had to wring every last penny of margin from something, and so they’ve looked at technology not as some sort of divine mandate but as a simple tool. You adopt what’s useful, in the way that’s the most useful.
But that’s not all. Amazon learned the simplest less of all with its Prime service, the lesson of ARPU. You’ll succeed even if you can’t grow your customer base as long as you can increase the average revenue per user. Amazon Prime is like an annuity. If Amazon can make Prime a durable value they get a slow but steady revenue growth from what’s now clear will be regular price increases for Prime. That’s in addition to their retail margins. People are paying Amazon to be customers. I don’t think an ad-sponsored mobile service would be a logical move for them and I’m not convinced that even ad-sponsored hardware would be. Their edge is that people pay, and where the money is, there is the future.
There’s been criticism of Prime Music as there has been of Prime Video. OK, I agree that if you’re on the leading edge of music or video you’re not going to sate yourself by consuming Prime stuff (as old-timer I’m not looking for the latest so I don’t see the problem myself but I understand those who do). That’s not the point. Make Prime valuable enough with incremental new stuff and you can get users to tolerate price creep. Which is ARPU creep for Amazon. Where in networking, besides them, do you find a company confidently predicting rising ARPU?
But there’s more. In an industry where everyone seems to be joining or creating standards groups, Amazon remains aloof. Their implied message; screw standards. All they do is encourage commoditization, empower those that are weaker. If you have the market power to go your own way, you do that. The Amazon cloud strategy is a good example. They’ll accept standards that help them and ignore the rest. This, while their service provider customers are spinning their wheels on consensus-building. Innovation trumps standardization any time in the real world.
In the cloud, arguably the biggest opportunity of the current age, Amazon is balancing forces others don’t even seem to see. They have to know, better than anyone, that pure IaaS is an economy of scale race to zero margins. Many companies would, as Microsoft has done, note that higher cloud service models are better for the user and the provider alike. But Amazon is incumbent in IaaS. Their solution was to create something above IaaS but not PaaS or SaaS. “Platform services” is what I’ve called it, but Amazon hasn’t even bothered to name it because they know they can demonstrate value and so don’t need market hype. Platform services are extensions to IaaS that draw on the Internet web service model; they create little islands of utility that any application can access, and so they’re agnostic on the xaaS debate. But they add value, people will pay for them, and they extend Amazon’s IaaS incumbency into the future. Salesforce and Microsoft may hold higher ground, but it’s in the middle of an open field of fire. Where do they go without coming down and facing the bullets?
Amazon will likely field a handset and become an MVNO. I think they’re even plotting their Internet of Things strategy. Why? Because they can. They have brand, they can make investments with low rates of return, they can build and leverage a growing customer base. They won’t do drone deliveries, but they got a lot of press with the idea and that was likely their goal. Rumors get you PR, but solid business offerings get you money. Ad sponsorship is something even Google and Facebook will have to augment for growth. Amazon is where both these giants would like to be.
Why is Amazon winning? Because they’re a better technology company? No, because they’re not a technology company at all. They are a mass-market retailer in an industry that is commoditizing. What better thing could you be? Apple wants cool people; they’ll never be the mass market. Google wants ad payment; that’s a less-than-zero-sum game. Amazon just wants everyone’s money and that’s the best thing of all to want, because it’s something you can strategize to get.
