AWS's Successor is ALS (Amazon Logistics Services) ?

Amazon Fucked up. Amazon wants to make up.

Apr 27, 2022

Hello there.

Much has happened since my last post. Most importantly, we have to wear masks again. And I HATE it.

Last couple weeks have seen some really cray-cray dramas play out.

Johnny Depp / Amber heard divorce proceedings are fascinating - reality TV fascinating. Like Bigg Boss. I made the mistake of clicking on a reddit link. Biggest. Mistake. Ever. There are more twists and turns in this whole cabaret than explosions in a Rohit Shetty movie. Here is one - Amber Heard claims she used a certain cosmetics kit to cover her bruises in 2016. The cosmetics brand puts out a statement saying she couldn’t have because they released the kit in 2017. See here.
Elon Musk has bought Twitter. Much drama ensued before deal seems to have been closed. I sincerely believe that the best use Elon could make of the $40bn is to simply shut Twitter down. Come on Tony Stark, do the noble thing. Because Lex Luthor bought Washington Post already….
After Reliance took over the best Future Retail stores, it told the banks that it will pay a lot less. Banks predictably balked. Reliance “pulled out”, making KLPD (NSFW) a signature Reliance move. Makes sense, when you have already taken the crown jewels away for free, why should one pay sums with 11 zeroes? Of course, the people who have to pay for the loss to the banks are the taxpayers of India. Motabhai gets his stores for (almost) free, Amazon will keep making a hue and cry over the whole thing, Lenders and Shareholders of Future Retail and (ostensibly) Kishore Biyani have lost big time. 3-4 years from now, when the real story comes out, I would love to see exactly how Biyani was compensated for this “Transfer”. Of Course, Amazon will keep saber rattling but since possession is 90% of the law, it looks like game over.

Also, Alia Bhatt is being hailed for being a pioneer for getting married on the roof of her house with only family present. I call her a plagiarist. May I remind you that Anupama and I got married in the garden of our condo in Peak Covid. Bollywood people keep stealing others’ ideas…..

Speaking of Amazon, I wanted to take a look today at one of its bigger screw-ups and it’s most recent moves. Let’s Go…

1. Real World vs Internet

Before we start, I want to point out a fundamental difference between internet aggregators and real world businesses from the lens of Marginal Costs. This will come into play later.

Think of any real world business - say Tata Motors. What are the kind of marginal costs it incurs?

There is COGS - to make the product.
There is distribution - getting the product to the customer.
There is transaction costs - think of these as enabling costs. Like credit card fees, or costs of customer support.

In contrast, think of any Aggregator business model (Uber, Zomato). Think of their product and its marginal costs:

There is zero marginal cost - goods "sold” are digital.
There is zero distribution cost - its all done for free on the internet.
Automated systems handle transactions - transaction costs are near zero.

Important to point out here that the Uber ride is a real world product (e.g.) but Uber’s real offering to you is just their app - an aggregator product.

2. Shopify vs Amazon

A few months and ~$130bn in market cap ago, Bloomberg Businessweek published an article that detailed how Shopify, and not Amazon is the everywhere store. The heart of the story was how Amazon blundered and underestimated a massive market opportunity. I quote:

“Amazon also operated a service that let independent merchants run their websites, called Webstore. Bang & Olufsen, Fruit of the Loom, and Lacoste were among the 80,000 or so companies that used it to run their online shops. If he wanted to, Bezos surely had the resources and engineering prowess to crush Shopify and steal its momentum.”
“But Amazon execs from that time admit that the Webstore service wasn’t very good, and its sales were dwarfed by all the rich opportunities the company was seeing in its global marketplace, where customers shop on Amazon.com, not on merchant websites.”
…
“In late 2015, in one of Bezos’ periodic purges of underachieving businesses, he agreed to close Webstore. Then, in a rare strategic mistake that’s likely to go down in the annals of corporate blunders, Amazon sent its customers to Shopify and proclaimed publicly that the Canadian company was its preferred partner for the Webstore diaspora. In exchange, Shopify agreed to offer Amazon Pay to its merchants and let them easily list their products on Amazon’s marketplace. Shopify also paid Amazon $1 million—a financial arrangement that’s never been previously reported.”

So, while ~~Lex Luthor~~ Bezos was distracted building a very large Flying Penis1 (and presumably overcompensating), he thought that small retailers and their piddly little online shops wouldn’t amount to much.

Small online retailers generated $150bn in sales in 2020. Of course, this is the kind of thing one misses when they have flying genitalia on their mind…..

3. Shopify’s Revenue Model

We’ll go to Albert Wang’s analysis of Shopify for this graphic2:

Forget the Numbers, the categories / breakup is important here

Now, Shopify began life on a SaaS model (Subscriptions Solutions bit on the right above). Now it has morphed into a commissions based model (the Merchant Solutions bit). The largest component of this stream is the Payments bit but that’s just par for course now. In 2019, Shopify announced its Shopify Fulfillment Network. Now that payments has matured, it is only now building out the critical pieces of a distribution network - presumably this is the next growth driver for Shopify.

Of Course, Amazon may have a few things to say about that….

4. Come Buy with Prime

From WSJ:

“Amazon.com Inc. is extending some of the offerings of its popular Prime membership program to merchants off its platform with a new service that embeds the online retailing giant’s payment and fulfillment options onto third-party sites.”
“Called Buy with Prime, the service will allow merchants to show the Prime logo and offer Amazon’s speedy delivery options on products listed on their own websites.”
…
“Participating merchants will use the Prime logo and display expected delivery dates on eligible products. Checkout will go through Amazon Pay and the company’s fulfillment network. Amazon will also manage free returns for eligible orders.”

It’s not an unexpected move. In fact, I would argue that this one was a long time coming. Ben Thompson wrote in an article that is still as relevant today as it was back in 2016:

“Prime is a super experience with superior prices and superior selection, and it too feeds into a scale play. The result is a business that looks like this:
E-commerce distribution has massive fixed costs but benefits tremendously from economies of scale
The cost to build-out Amazon’s fulfillment centers was justified because the first and best customer is Amazon’s e-commerce business
That last bullet point may seem odd, but in fact 40% of Amazon’s sales (on a unit basis) are sold by 3rd-party merchants; most of these merchants leverage Fulfilled-by-Amazon, which means their goods are stored in Amazon’s fulfillment centers and covered by Prime. This increases the return to scale for Amazon’s fulfillment centers, increases the value of Prime, and deepens Amazon’s moat.”

Now, Amazon opened up AWS - and it was a crazy, crazy success. I would argue that Amazon’s logistics business will likely follow the same path. It all boils down to “return on scale” which in turn widens Amazon’s moat even more.

5. Moving way past Aggregation.

Now, you may want to ask me - isn’t Amazon creating it’s own competitor? Yes and No. You see, the answer is yes if you think of Amazon as only an aggregator. But it’s a firm no if you think of it as a real world business.

Confusing? Bear with me.

Remember the first section where we looked at the marginal costs of real-world and aggregator businesses? Amazon’s retail operations are not an aggregation business. There are significant marginal costs involved. Hell, in Amazon’s case, the relative cost of distribution itself is a moat because it is so low on account of scale.

Closest Amazon comes to aggregators is its iron-fisted control of Demand. Because Amazon is the gatekeeper to the Demand, it has tremendous power over the supply side - i.e. the Sellers. Oh, and BTW, it has access to crazy amounts of data which it can feed into its self-contained ad platform that is untouched by regulation and walled off from EVERYONE.

Effectively, Amazon is opening up its logistics because it’s control over demand has effectively limited its overall addressable market. Think of the alternate stack to Amazon (let’s call it the Amazon-Alt stack). Its key components are:

Google handles discovery by helping find the products on 3rd-party e-commerce sites.
Facebook offers opportunity for paid marketing.
Shopify builds the storefronts.
A fintech company (Stripe, Paypal, insert your favourite one here) handles payments.
3PLs3 package and ship the goods.
Fedex, Aramex, Delhivery, DTDC deliver the actual packages.

Now, this stack is very attractive to companies that have their own, strong brands. They have the wherewithal to attract customers on their own and they don’t really need to compete to be the answer to generic search terms on Amazon. They can drive customers to their own Shopify powered websites. Pretty elegant and egalitarian right? Wrong.

Here’s the problem - Expectations being brought over from Amazon.

6. Experience is a Moat

Shippo’s CEO in an Interview:

“Consumers have those expectations from Amazon that shipping should be free, it should be two days, and whatever those are expectations are, returns should be free. That is still carried over when I’m buying on this branded website. If the expectations are not met, consumers decide to buy somewhere else”
…
“Merchants are constantly trying to play catch up, whatever Amazon is doing they need to follow suit.”

So, Amazon has effectively set up unreasonable expectations only it can meet. So, these off-Amazon, strong brands lose customers to other avenues because their shipping experience is NOT like Amazon. In turn, Amazon loses business to other channels where these brands are available (say Walmart).

See where all this comes together?

The best way to offer an amazon-esque shipping experience to your customers is to simply ship using Amazon. You can keep using Shopify and its ecosystem and the rest of the Amazon-Alt stack for your business - just let Amazon handle the logistics.

Sure, Amazon may have given away a huge opportunity in 2015, but it wouldn’t really matter a lot if said business ends up being a commoditized complement to Amazon’s logistics. Amazon’s Logistics business has an impossibly wide moat4 that deepens the larger it becomes.

Conclusion: Shopify needs to build an advertising business. Success in Logistics may take too much time and effort and definitely NOT guaranteed.

Asides

I found this Eddie Murphy’s 1983 special on youtube. It’s extremely politically incorrect for 2022 and all kinds of amazing. Watch here:

Housekeeping

As always, I look forward to hearing from you. If you liked this post, pls feel free to share this or subscribe to this newsletter using the links below. I try to write a 1000-2000 word essay once every two weeks or so.

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