Amazon’s Quest to Become the Retail Operating System

Next week, in New York, the retail industry will meet at the National Retail Federation “Big Show”. There will be much talk about the continued impact technology is having on them. One of the topics surely being discussed will be recent announcements made by Amazon about its Amazon Go grocery stores, which is presented as the future of grocery shopping.

While there may be worries about Amazon looking to displace existing incumbents,  what we may see here is the 4th step in Amazon’s continuous effort to become the retail operating system.

Amazon 1.0: The General Store

In its first iteration, Amazon was like most other online retailers, sticking to a set of products (initially books) until it eventually extended to a wider set of categories to become a general store.

Under this model, Amazon was primarily a version of Sears or Walmart, selling products electronically as opposed to selling them in physical stores and leveraging its lack of physical space as a way to present a broader set of products.

Amazon 2.0: The Mall

In the early 2000s, Amazon started showing its wider game, as it created a marketplace allowing 3rd parties to set up shop on the site. By 2002, companies like Target and ill-fated bookseller Borders hosted their digital infrastructure on Amazon, loaning digital retail capabilities from the Seattle company.

This shift represented the beginning of a larger strategy for Amazon, which moved from being an online store to something different, something more like an online version of a mall, giving other shops the ability to sell their products on top of Amazon’s infrastructure and at a convenient address. It also set things up for the next phase of Amazon

Amazon 3.0: The Digital Infrastructure

In a little-noticed announcement in 2006, Amazon moved to leverage extra capacity it had built by renting it out to anyone who wanted to use it. The company started giving third party access to its massive data centers for a fee through a program called “Amazon Web Services.” The initial concept came as a way to lower the cost of rolling out data centers as the company rented out spare capacity it had built with plans for future growth.

Amazon Web Services proved to be a very successful offering, and can now be credited for powering the infrastructure of a large number of internet services ranging from small startups to companies as large as GE, Netflix, AirBnB, Spotify, and Reddit. This success led the company

This success led the company to start launching a series of services mirroring its existing capabilities, moving it from retail mall to full digital infrastructure provider. Amazon can not only host your online presence, either through Amazon marketplace or by hosting your site on Amazon Web Services but retailers can also have Amazon take care of the complete fulfillment of order, for a fee.

This is where Amazon sits today but recent developments seem to point to a wider future.

Amazon 4.0: The Retail Operating System

With the release of Amazon Go, it appears Amazon is expanding into the physical retail space. While the creation of physical by a digital player seem to be out of step with what you might expect from one of the largest e-tailers in the world, the model seems to follow what has now become a routine approach for Amazon:

  • Step 1: Demonstrate a new technology capability through the use of technology under your own brand.
  • Step 2: Provide the technology, for a fee, to other parties so they can mimic what you offer by sitting on your infrastructure
  • Step 3: Expand the capabilities and make more services available to increase the stickiness of your platform with those other parties.
  • Step 4: Repeat

I would contend that the introduction of Amazon Go and of the Amazon bookstores is only the first step in demonstrating how Amazon thinks a physical store should be running. From a store standpoint, they present capabilities that are currently unheard of in the retail world: the ability to walk into a store, pick up physical goods and just walk out without having to deal with the friction of cashier lines and payment takes the Uber experience into retail. But the magic required to make such an experience happen demands the installation of sensors in a very precise order.

I would not be surprised if, within the next couple of years, we heard about grocery stores partnering with Amazon to use Amazon Go on a leased basis. The new model would be one where Amazon employees deploy and manage “Amazon Go” infrastructures in other grocery stores, working as infrastructure providers to the retailers.

When combined with their existing service, Amazon would then be embedded in every aspect of the retail world, recasting itself as the retail operating system.

Why would Amazon go this way?

First of all: Margin. The growth of Amazon Web Services and related offerings has shown to be a much more successful offering for Amazon than its own retail presence. It turns out that providing product and services to third parties is much more lucrative than by the initial seller.

The second reason for the Amazon Retail Operating System is that Amazon may be readying for the end of its dominance in the e-tail space. With companies like Alibaba and Walmart (through the acquisition of gunning for Amazon’s top spot, the battle is about to get very tough. But in the infrastructure world, Amazon is still quite a distance ahead of its competitors. And that may be the big strategic advantage the company wants to retain, as physical integration could mean a decades-long sustainable gain over anyone else trying to follow suit.

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