Wednesday, June 6, 2012

The Amazon Credo (And Who Are the Middlemen Exactly?)

Here's an important note about the philosophy. The world is composed of three types of entities. 

First, you have creators. They write books. They invent things. They code software. They record music. They program video games. They manufacture products. These people and entities are the basic unit of innovation and productivity in the world. They are to be empowered.

Next, you have customers, the consumers of the output from creatorsThey are the buyers, the readers, the end-users, the watchers, the listeners, and the players. They are the core asset of Amazon. They are to be invested in. They are to be defended. 

Finally, you have middlemen. These are the people and entities that stand between the creators and customers. Oftentimes they have a purpose. But when they become gatekeepers that prevent access to the market by creators...or when they become toll-takers, charging fees to creators or customers in excess of the value they generate, they are the enemy of Amazon. They are to be disintermediated.

Amazon operates on a pretty straightforward credo. It goes something like this:

Fidelity to the customer; Fraternity with the creators; and Contempt for the Middlemen.  

Amazon's fidelity to the customer is a thing of legend. At the moment, I don't think it requires much additional commentary. Things get more interesting as you think about the company's approach to the other two players. 

Fraternity with the creators is an intensely interesting topic when thinking about Amazon. It's steeped in the passions of CEO Jeff Bezos. Here's a remark he made in an interview with Charlie Rose in 2001 (you can view it here):

I am a dyed in the wool optimist. We live in an era of incredible invention, and what drives the economy is invention...A long time ago people thought it was raw materials that drove the economy, and whichever country had more gold was the richest country.

That's not true anymore.

What drives economies is the education of the people and the innovation that they can then create. And I see a world which - in part because of the internet - is about ready to explode with innovation everywhere.

...It used to be that if you were a genius and you lived in India, it was a little bit harder for you to make an economic contribution to the world. What you do now is create the next great software, and you do it from wherever you are, and you communicate with the world community of software engineers. This is a big deal. And so if you believe fundamentally, and I do , that innovation is what drives world prosperity, I say hang on to your seat.
Bezos sees creators as kindred souls. He draws inspiration from the idea that his company is nurturing the media creators can use to produce and sell their wares (be that music, books, products, software, etc.). These are the marketplaces of Amazon...Selling on AmazonAWSKindle Direct PublishingCreateSpaceMechanical Turk, and more. There is much written about these marketplaces.

The real point of interest comes in with Amazon's approach to the middlemen. The contempt is almost palpable, but far from universal. While I think it's accurate to say Amazon is on a long-term mission to disintermediate the middleman from every industry in which it either currently does business or will do business in the future, the company has a long history of tolerating them while they provide value to Amazon. 

I think the best example of that is the book wholesalers with which Amazon did business in its early days. At the time, Amazon was so small that there was no chance publishers would do business directly with it. It was not their model anyway. They preferred to sell books to distributors whose job then became getting the product into the proper retail channel. 

These wholesalers were happy to work with Amazon the start-up. It was another channel for selling. And for a time, this was a harmonious relationship. But as soon as Amazon built some clout through its buying volume, it used its new standing to knock on the door of the publishing companies. Cut out the middleman wholesalers, it told them. Sell directly to us. It will be cheaper for both of us. 

Eventually they did, and the major wholesalers were cut out...disintermediated in Amazonian parlance. 

I would assume the publishers liked this arrangement for many years. But with the advent of a viable commercial ebook platform, Amazon started getting that hungry look in its eye when it looked over the price of books when publishers produce, promote, and distributed them. And the costs of keeping this analog player as part of the digital world? 

Publishers were middlemen, and the worst kind. They were gatekeepers (preventing many an aspiring author from being published) and toll-takers (charging too high a fee for the services they provide). 

He who was once the friend of the wolf has become the dinner for the wolf.

This question of middlemen becomes particularly interesting as you look at all the companies with whom Amazon does business today across all its businesses. I doubt many think of themselves as middlemen. I'm quite certain most of them are treated as valued partners. But will they always be? 

I see a lot of software companies preparing to offer their products on the AWS marketplace. I think they need to consider what the long-term implications of that move might be. 

There is, of course, one middleman that Amazon can tolerate...Amazon. As the medium for buying and selling, that's exactly what it is. The world cannot be rid of middlemen. But I think Jeff Bezos thinks of there being only one. And, in his mind at least, as defender of the customer and facilitator of the creators, this middleman is playing a very important role.

This post was originally published here on Adjacent Progression.