Business Models. Ecosystems & Amazon

We have talked  about how important is a robust sustainable business model to excel in this current mobile devices space, traditional way of competing on price and specs won’t cut it. The battle has moved from hardware to software to services to ecosystem and then to ‘experiences’ to maintain stickiness.

Ecosystem in this connected world means a platform for users to live in, which caters all of their needs from communication to content to context in a very coherent way.  The companies with stronger business model have succeeded in building a robust ecosystem starting from either hardware, software, services crafting tighter experiences. These ecosystem leaders are thus building stronger user base and developer base key for ecosystem to thrive.

The key goal of an ecosystem player is to create stickiness, lock-in and brand loyalty to maximize the customer life time value (CLV). This in turn offers ample opportunities for everyone in the ecosystem to cross- sell their offerings again and again for improving their respective top-line and bottom-line.

Apple has done a marvelous job at this, to become an ecosystem leader leveraging its tighter vertical business model roping in premium users to capture lion share of industry revenues and profits. Other well positioned ecosystem leaders are Microsoft and Google with their respective business models which can be called as “diagonally integrated” (horizontal + vertical).

Other players such as Amazon, a proven leader in e-commerce retail space over the years has been strengthening its arsenal with more connected lifestyle specific content in its store to build a stickier ecosystem of its own.

Amazon commenced with bundling hardware (1st Gen Kindle e-reader) with content (books) and connectivity (cellular data) in 2008 to lock-in the users to sell more content over the lifetime of the device taking first step towards building its own ‘Kindle’ ecosystem. While the business model looked promising the ROI was not guaranteed and the growth was eventually soon challenged by advent of tablets such as Apple’s iPad. This caused Amazon to build a “Kindle” app for tablet form-factor and participate in the Apple ecosystem. Amazon instantly became a horizontal player (for its own good) in mobile devices space than the expected path to set the market on fire with its own hardware bundled play. However, Amazon vertical ambitions didn’t slow down instead it challenged iPad with its own Kindle Fire series of tablets based on Android platform.

According to our Market Monitor research, Amazon has so far shipped more than 21 million Kindle fire series tablets till date globally, making it fourth largest tablet supplier globally in terms of cumulative tablet shipments since launch of iPad in 2010. However, for comparison Apple has shipped more than 211 million iPads cumulatively, almost 10x more than Amazon. This determines which ecosystem is lucrative to developers and attractive to consumers.

Next, Amazon announced its ambition to extend its retail footprint across TV screens launching its first-ever set-top-box Fire TV, with major focus to sell its video and gaming content. And, with today’s announcement, Amazon is going after the highly desired screen which is mobile and personal — smartphone — with its new fire Phone smartphone.

Exhibit 1: Amazon Multi-Screen Portfolio

Amazon Ecosystem, sticky enough?

So Amazon with the new fire Phone smartphone has extended its retail cloud ecosystem consisting of tightly integrated Amazon apps, content and services reach across three screens tablets, TV and now smartphone. Before discussing the fire Phone let’s first evaluate the Amazon ecosystem why does this move makes sense from Amazon’s perspective and if it will succeed or fail.

• Amazon over the last decade has improved by leaps and bounds in expanding its online store from physical products to digital products
• This huge catalog of digital content has sparked a need for Amazon to enter with its own branded smart-hardware to offer unique experiences to its customer base to access, purchase and consume content in addition to its horizontal play of own-branded apps on other platforms and devices
• This is Amazon’s way of locking-in the users within its ecosystem similar to Apple, which tries to tightly integrate and tailor its software, apps, services to ramp up brand loyalty

Exhibit 2: Amazon’s Ecosystem – Sticky enough?

• Amazon digital ecosystem with exclusive sub-ecosystem which Amazon calls “Prime Ecosystem” now includes
  • Apps – 240,000 apps on Amazon store
  • Music – 30 million titles (more than million unlimited Prime music songs)
  • Video – 90,000 titles (out of which 40,000 unlimited Prime Instant video streaming titles)
  • Books – 500,000 Kindle exclusive titles (with 70,000 MatchBook titles)
  • Cloud Storage – 5GB free (Unlimited for fire Phone users)
  • Maps – Using Nokia’s HERE platform
• The above ecosystem from content point of view is very attractive for Amazon customers (especially Prime subs) locked-in to Amazon ecosystem. However, the ecosystem lacks global scale as limited amount of the above content and exclusive Prime experiences are available outside USA and a few other select markets
• The bulk of the tens of millions of Amazon Prime subscribers are situated in USA
• This instantly reduces the potential for Amazon ecosystem to generate global level scale in near- to mid-term compared to likes of Apple, Google or Microsoft’s ecosystems
• Amazon’s ecosystem thus offers a higher value proposition to US Amazon loyalists with rather inconsistent value prop outside its home market limiting its growth prospects
• Amazon will need to work hard to replicate similar business model approach outside US successfully, so far only ‘Kindle e-readers’ have gained some traction in markets where Amazon operates in but nothing beyond that
• A robust offerings of apps, content and services across globe will increase chances for Amazon to sell its own branded hardware and unique experiences to gain scale, expand ecosystem and improve its top and bottom lines
• The global breadth of the ecosystem and reach will also attract app developer communities to participate (i.e. tweaking apps integrating Amazon’s SDKs) without any hesitation
• Though Amazon is making some strides going after bigger high-scale markets such as India which might pay-off over the next decade or so

Amazon fire PHONE

Let’s see what it has to offer from hardware perspective with its new “fire PHONE”

Exhibit 3: Amazon fire Phone showing off Dynamic Perspective

• Amazon announced its first ever designed and Amazon branded smartphone called “fire PHONE“
• fire PHONE is a smartphone equipped with 4.7 inch LCD display sporting last year’s 2.2GHz Qualcomm Snapdragon 800 processor with 2GB RAM running its custom Android Open Source Platform (AOSP) based Fire OS 3.5.0 and in-built 32GB storage

• To differentiate from the above regular specs with competitors, Amazon is offering following features
  • Unlimited cloud storage for all the content on the device (another vertical integration advantage — its popular Amazon Web Services (AWS) infrastructure
  • Dynamic Perspective offers an immersive autostereoscopic 3D type experience across content & apps by employing ultra-low power specialized cameras, four infrared LEDs, a dedicated custom processor, real-time computer vision algorithms, and a custom power-efficient graphics rendering engine to track head movements in real time. Amazon has released a Dynamic Perspective SDK for developers to integrate this tech into more apps, content and services offering a differentiated experience. Powerful experiences can be shaped in terms of 3D maps, immersive e-book reading and 3D gaming
  • Firefly is another unique feature which can be activated with a dedicated button on the fire phone to allow users to recognize and interact with real world objects – QR and bar codes, products, artwork, songs, movies, etc. (more than 10 million items in the database). A good way to loop back users to either Amazon store or in-app purchases or content search using Firefly SDK. Developers will love this feature
  • Mayday is a feature which offers perennial round the clock live video device support by simply hitting the Mayday button in quick actions menu of the device. Consumers will love this feature
  • Prime Membership – Amazon has included a full year of Amazon Prime membership which enables unlimited streaming and downloads of tens of thousands of popular movies and TV episodes with Prime Instant Video, over one million songs and hundreds of playlists with the all-new Prime Music, over 500,000 books to borrow for free with the Kindle Owners’ Lending Library, and free Two-Day Shipping on millions of items

• Overall a good bundle of hardware, software and services for living in Amazon ecosystem, however, within its home market Amazon has chosen to launch phone exclusively with AT&T
• Exclusive launch of fire Phone on AT&T networks implies decent subsidies and agreed upon marketing support from the carrier to promote and sell the device exclusively
• This limits the Total Addressable Market (TAM) for Amazon’s new offering to tap into its larger base of users in USA, however, Amazon will have to soon expand the distribution channels to succeed
• Also, unlike some of the previous Kindle models, Amazon has not bundled the connectivity (3G or 4G) within the cost of the device and an unlocked price of $650 or the subsidized price of $199 (with 2 years plan) is in the iPhone 5s or Galaxy S5 territory which is too high. Makes an unattractive proposition for price-conscious consumers
• All the features bundled with fire phone makes it a great shopping tool for Amazon, essentially putting POS device into the hands of consumers

In summary, the lack of wider distribution, higher pricing and bounded to Amazon ecosystem offsets the other value propositions which Amazon brings to the table with fire PHONE. For non-power Amazon users, fire phone does not offer enough value to jump ship from their versatile, mature and preferred ecosystems and devices (Google, Apple, etc.). Even if Amazon attracts 20% of its tens of millions of Prime subscribers to buy the fire phone, Amazon won’t move the needle in terms of snatching share away from the competition.

However, we believe Amazon will continue to try its best to cast net (even though limited) to realize its multi-screen strategy with its own branded hardware to extend the reach of its retail cloud and offer unique Amazon branded experience. We predict ‘Fire Dash‘ would be the next product — in-vehicle auto-grade content access, consumption and shopping experience — Amazon would go after.

In our view, being diagonally integrated is not an ideal strategy for Amazon to succeed considering the limited global presence and scale it can realize for its hardware, in contrast a So-Lo-Mo-Co strategy should be more important for Amazon to adopt to compete with the new form of competition which could endanger Amazon’s existing business model approach.