We observed in The Upside of Disruption that asset management firms are facing a classic case of the Innovator’s Dilemma: “Do they embrace disruptive technologies and business models, which may not be profitable for some time, could undercut current product lines and may not succeed at all?” As they weigh this critical decision, some lessons can be learned from Amazon’s journey.
Amazon pioneered the modern e-commerce experience, conditioning consumers to expect personalisation, convenience, product reviews, insightful recommendations and instant gratification (or at least next-day delivery). Every business is now forced to compete on the customer-experience front.
It is also worth noting what Amazon hasn’t done. Despite the potential use of virtual reality in online shopping environments, VR is not a technology the company has chosen to explore in any great depth. Despite substantial investment and no lack of enthusiasm dating back nearly three decades, virtual reality has failed to find a place in our day-to-day lives, and Amazon has to date shown no need to be a pioneer in this regard. Innovation can be a tricky process littered with unanticipated obstacles and dead ends; promising technologies can prove to be solutions in search of problems. For Amazon at least, the basics are vastly more important, and profitable, than bells and whistles.
PLAN FOR PRIVATE LABELS
Platforms can provide much needed visibility to smaller vendors, but there is a potentially deadly downside: There is little stopping the platform itself from entering certain product categories, leveraging knowledge it has collected on which features and attributes are most appealing to customers. Amazon has moved into its own private label products in a big way with AmazonBasics (household), Essentials (clothing), Collection (jewelry), Elements (vitamins), 365 (food) and many other verticals. A strategy pioneered by supermarket chains, private labeling requires scale and a deft touch to succeed. Precursors exist already in asset management, of course, in the form of subadvisory relationships. Any successful platform in financial services should be expected to expand this concept to some degree. Vendors typically don’t like the idea, but they may not feel that they have much of a choice, and in fact may embrace it if greatly expands their distribution base. That said, more prominent brands might choose to step away and plant their flag elsewhere, much as Nike did with Amazon.
THE ROBOTS ARE COMING
It doesn’t require a dystopian view of the future to acknowledge some facts about the relentless forward march of technology. At companies like Amazon, for example, it is becoming evident that people are often the weakest links in processes designed to provide the most satisfactory experience for end users. Robots are still commonly thought of as warehouse workers, but they are effectively managing human employees in many cases. Algorithms still work for investment professionals, but advances in machine learning mean that dynamic may slow down or even be reversed before long.
TECHNOLOGY IS NOT ENOUGH
Technology is at the heart of the current revolution in financial services, but it is insufficient on its own. Human expertise is required to effectively harness the power of technology in many cases. Consider the relatively cloistered world of illiquid asset classes. Barriers to investing are already being lowered and we expect illiquid assets to be a key area of focus for platforms in the not-too-distant future. But simply setting up an exchange is insufficient. The insights of industry professionals need to be translated into tools that can be used effectively by newcomers.
Amazon has hired an army of specialised labor through hiring and a steady stream of acquisitions. Their systematic approach to filling positions that haven’t yet been invented might be hard to fathom for asset managers with collegial cultures more used to making key hires from the same few universities and competitor organisations.
BEWARE THE FAST FOLLOWERS
Innovators get the glory, but every MBA student knows that being a “fast follower” can be an equally effective, and perhaps more profitable, strategy. Netflix, for example, pioneered video on demand by sending DVDs to people in their homes. While initially making pricing miscues, they pivoted to online delivery as soon as the bandwidth became available. When capital became available, they plowed it into producing original content. The company’s successful case study will be analysed for years to come, but Netflix faced a suddenly formidable competitor in late 2019 with the launch of Disney+. Building an online distribution platform for one of the most storied media catalogues in history would seem like a no-brainer, but it wasn’t without risks. Nevertheless, within five months of launching the service, Disney+ passed 50 million paying subscribers.14 Netflix CEO Reed Hastings went so far as to praise the Disney+ rollout as the best example he’d ever seen of an incumbent disrupting itself.15
DON’T SCARE OFF YOUR PARTNERS
Ceding too much control to distribution partners has long concerned companies in many sectors, and online commerce is no different. Amazon has seen its share of defections in recent years, including giants like Nike, who opted for a direct-to-consumer model in part because they wanted to stamp out grey market distribution and counterfeiting.16 They are not alone. Vans, Rolex, Louis Vuitton, Patagonia and The North Face are among those that have also cut the cord. That being said, it will be interesting to see how well they fare through the COVID-19 pandemic compared with Amazon.
Smaller companies would find it more challenging to live without the distribution reach, logistics and fulfillment offered by Amazon, but this may change as marketing is increasingly done via social media and a growing ecosystem of companies provides the products and services necessary to deliver a high-quality customer experience online. In the retail world, this includes companies like Shopify, Stripe, Affirm, ShipBob, Returnly and Darkstore. Shopify alone powers more than one million independent online shops. A growing ecosystem of fintech firms looks to mirror this development.
THE IMPORTANCE OF COMMUNITY
Amazon itself has never really built a community, but its system of reviews serves some of the same functions, operating as a forum for dialogue. While the review system is open for misuse, it offers radically more transparency, allowing peers to validate or condemn a product and fixing a bright light on marketing claims and subjecting them to the scrutiny of other consumers. More recently, the remarkable success of Twitch as a video-based community might (subject to regulatory approval) illuminate the path to a new type of interaction among investment professionals and their clients.
REVENUE STREAMS WILL BE REARRANGED
Fee compression has been unavoidable for many managers in recent years, and the growing role of platforms would presumably exacerbate that trend. But this assumes that investment products are increasingly treated as commodities. This is likely to be true for a large swath of the industry, but it does not tell the whole story. As private securities become more liquid and mainstream and machine learning is integrated into a growing number of algorithmic strategies, it is entirely possible, if not likely, that emerging platforms will permit the blossoming of an unprecedented variety of investment products.
FEAR SHOULDN’T OBSCURE THE OPPORTUNITY
Change can be terrifying, but platforms have empowered as many businesses as they have threatened. Sites like TripAdvisor and Yelp can be controversial, but they have also shone a light on outstanding products and services, permitted businesses to learn a great deal more about customer preferences, and enabled new strategies for engaging customers. Platforms such as Amazon accrue a tremendous amount of wealth, but they also democratise markets, opening doors for smaller firms that would have had no ability to compete on a larger stage.
In 2016, we wrote in The Upside of Disruption that “Amazon has shown what can be built by starting with the customer and working backward.” We should note that while Amazon did indeed build its business based on creating an excellent customer experience, it established its retail hegemony by sacrificing profits for market share over many years. Only in 2019 did operating margins begin to consistently exceed 5%. For most of the previous decade, they hovered between 0% and 3%.17
If this sounds familiar, it is because the firms winning the most new business in asset management are the ones most committed to low prices. Investment strategies, of course, are not fungible commodities. Passive investors have benefited from a combination of low cost and high returns for many years—on the back of the longest bull market in history—but it is not hard to imagine a less buoyant or highly volatile market environment taking the shine off of all that beta exposure. Differentiation will always have a place in asset management due to the varying preferences, needs and perspectives of investors who are ultimately more concerned with value than with the lowest price.
This is why platforms will be so critical in the industry going forward. By lowering the barriers to entry and offering easy access to talented investment professionals alongside innovative tools, liquidity and transparency, emerging Amazons of financial services will ultimately improve the investing experience for both individuals and institutions. Most investment firms do not aspire to be platforms. It isn’t in their DNA, their goals or their aspirations. That doesn’t mean they can ignore Amazonisation: Not having an actionable plan for emerging platforms is laying a course toward inevitable failure. More importantly, it could mean missing the opportunity of a lifetime.download the full paper
1 Paul Demery, “Bezos: I never expected this,” Digital Commerce 360, January 14, 2013.
2 Dan Blystone, “Understanding the Alibaba Business Model,” Investopedia, October 20, 2019.
3 Jennifer Saibil, “How Nike Leaving Amazon Has Changed the Face of Retail,” Motley Fool, January 29, 2020.
4 Crunchbase Pro.
5 Stephen McBride, “Is This the Beginning of Amazon’s Meltdown?,” Forbes.com, January 2, 2020.
8 M. Szmigiera, “Value of global venture capital investment in Fintech companies from 2010 to 2019,” Statista.com, February 28, 2020.
9 Iman Ghosh, “Visualizing the Current Landscape of the Fintech Industry,” Visual Capitalist, January 28, 2020.
10 Strategic Insight, Simfund database as of December 31, 2019.
11 Ron Shevlin, “Amazon’s Impending Invasion of Banking,” Forbes.com, July 8, 2019.
12 Ding Yining, “Ant Fortune offers tailor-made wealth management service,” Shine.cn, June 20, 2019.
13 Julie Zhu, Kane Wu and Zhang Yan, “China’s Ant aims for $200 billion price tag in private share sales,” Reuters.com, January 17, 2020.
14 Samuel Roberts, “Disney Plus passes 50 million paid subscribers—here’s how it compares to Netflix,” TechRadar.com, April 9, 2020.
15 Alex Sherman, “Disney+ has a big fan: Netflix CEO Reed Hastings,” cnbc.com, April 21, 2020.
16 Jennifer Saibil, “How Nike Leaving Amazon Has Changed the Face of Retail,” Motley Fool, January 29, 2020.
17 Macrotrends.net, “Amazon Operating Margin 2006-2020,” as of June 30, 2020.
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