The Exponential Pull of Innovation: Amazonization 2.0

Part One -- The Rise of Amazon and Recent Developments

38% Amazon's share of the e-commerce market

The Rise of Amazon

Amazon is so deeply embedded in our modern lives that it can be difficult to recall life before the never-ending streams of cardboard boxes started showing up on our doorsteps. But the 1990s were a different time. When Netscape Navigator first made the internet accessible to the masses, widespread amazement was quickly followed by frustration over what wasn’t there.

Countless entrepreneurs quickly addressed one niche after another, but few had the vision of the former Wall Streeter who decided—initially—to sell books online. But Jeff Bezos had bigger ideas. He wanted to build a platform for selling…everything.

We first wrote about “Amazonization” in 2016’s The Upside of Disruption. At that time, it had only been a few short years since Amazon was recognized as the largest online retailer in the world,1 and the term served as convenient shorthand for the growing power of online platforms. China’s Alibaba is a similar powerhouse, accounting for well over half of all online retail sales in China and boasting 755 million active users.2 But it is not only generalist behemoths that are succeeding. Noted in the original white paper for having more than 1.4 million sellers of handcrafted goods on its platform, Etsy now boasts 2.5 million vendors and 45.7 million buyers.

Meanwhile, Amazon has gone from strength to strength, with its share price gaining more than 400% over the five years ending in 2019, almost 10 times the growth of the S&P 500. In that time, it also became one of very few companies to ever record a market capitalization of more than $1 trillion. With $87.4 billion of revenue and $3.3 billion of net income at year-end 2019, Amazon is still the world’s largest online retailer. It owns approximately 38% of the e-commerce market3 and has managed to flourish even more during the coronavirus pandemic that brought much of the global economy to its knees. As retailers from Barneys, Neiman Marcus and JC Penney to Hertz, Modell’s Sporting Goods and Gold’s Gym file for bankruptcy, there is growing concern that Amazon, while doing nothing illegal and taking advantage of the market economy, is becoming too big.

The company’s dominance means Amazonization is no longer just an observation that a particular segment is being upended by an online competitor generally. It increasingly means an industry is being disrupted by one very specific and voracious firm. As Jeff Bezos famously said, “Your margin is my opportunity.”

The fact that Amazonization now has both literal and metaphorical meanings is particularly noteworthy here, because there is still no Amazon of financial services. Despite some tentative moves into vendor financing and consumer credit, Amazon itself is still operating on the fringes of the sector. Meanwhile, the asset management landscape remains as competitive as ever, and the frenzied financing of fintech startups has produced a complex ecosystem of companies that have yet to coalesce around any dominant platform. It is entirely possible that Amazon will find ways to disrupt financial services in the future, but our focus here is more on the impact of the business model, rather than on the company itself.

Acquisitions have been a part of the culture of innovation. By year-end 2019, Amazon had acquired 86 companies.

Recent Developments

How did an online bookseller come to dominate commerce? Amazon’s growth is attributable in part to a ruthless dedication to low prices, but its outstanding customer experience is equally important and far-reaching. Amazon’s combination of price, convenience, transparency, community and insight has raised the bar to lofty heights that few competitors can clear.

Core values are vital, but Amazon would not be what it is today without innovation. Success is not guaranteed: The Fire Phone and Amazon Destinations are just two examples of the many products that failed to take hold. Conversely, the Kindle and Amazon Web Services (AWS) are both good examples of creating vast, profitable businesses virtually out of thin air.

Amazon has fostered a culture of innovation that is unafraid to look outside its four walls for pioneering approaches that can advance the company’s agenda. Its history of acquisitions clearly shows a willingness to ferret out new perspectives, expertise, technology and best practices in other industries. Beginning in 1998 with its purchase of IMDb, Amazon hinted at its aspirations to monetize all types of data, even without a clear roadmap in place. By year-end 2019, it had acquired 85 additional companies.4 Some of the most famous acquisitions were clearly aimed at establishing a prominent foothold in specific verticals. Zappos—purchased for $1.2 billion in 2009—provided instant scale in the footwear space. Whole Foods—acquired for $13.7 billion eight years later—provided a unique entrée into the supermarket business.

Most deals, however, have been carefully selected to bolt additional functionality onto the platform’s growing infrastructure. So synonymous is Alexa with Amazon now that many people are likely to have forgotten that Alexa.com was purchased for $250 million back in 1999. It has of course gone on to form the foundation of Amazon’s omnipresent personal assistant, which offers the ability to retrieve information or make a purchase with only a few spoken words. In 2012, Amazon turbocharged its fulfillment capabilities by buying Kiva Systems for $775 million. Kiva’s robots are critical enablers of Amazon’s expanding logistics infrastructure, which is now said to include 150 million square feet of warehouse space, delivery trucks and vans numbering in the tens of thousands and even cargo ships and aircraft.5

Amazon’s most recent acquisition is Chicago-based Health Navigator, which didn’t even exist at the time of the Alexa deal. An enterprise that initially seems far removed from Amazon’s core business makes significantly more sense in light of its promise to “set the standard for digital health clinical content quality.”6 With the world’s attention squarely on health and welfare as a result of the COVID-19 pandemic, it is not hard to imagine how a partnership like this could lead to a revolution in diagnostics, patient care, resource allocation and other aspects of healthcare. It also illustrates a potential path for the financial services industry, where many firms are currently trying to knit together disparate data streams and analytical capabilities into a coherent value proposition. Healthcare is an increasingly important financial consideration in an aging world, particularly in the United States, where costs are high and insurance companies are often closely integrated into the broader asset management sector.

One of Amazon’s most prescient acquisitions may have been Twitch. Bought for almost a billion dollars in cash in 2014, this social video platform for gamers is not only paying for itself already, but also painting a vivid picture of what real-time, data-enriched community interactions look like. It places Amazon squarely in the middle of the massive global marketplace for electronic games and sports, but it could also prove to be a template for next-generation trading environments.

Read the next section

Legal Note

The Investment Manager Services division is an internal business unit of SEI Investments Company. This information is provided for education purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.