David Chappell

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AWS and the Risks of Being a Conglomerate  
# Tuesday, November 28, 2017
 
The launch of Amazon Web Services in 2006 was a milestone in technology innovation. AWS was the harbinger of our now cloud-mad world, where doing new projects solely in on-premises datacenters has become kind of quaint. AWS was--and remains--a great achievement.

Any company that can pull off a technological achievement like this must qualify as a technology company, right? Amazon is also a retailer, of course, but even this business is based on the company's unique technical foundation. Given all of this, it's natural to view Amazon as first and foremost a technology firm.

But this isn't correct. In fact, Amazon is a conglomerate, one of the few to appear in recent decades. To understand why this is true, think about all the companies that Amazon competes with. The diagram below shows some of the most important.

In retail, Amazon competes with Walmart, Target, Alibaba, and pretty much every other retailer in the world. In cloud platforms, AWS competes with Microsoft Azure, Google Cloud Platform, and others. Amazon Video competes with Netflix and Hulu and others, while Amazon Devices sells hardware against Apple, Google, Samsung, and more. With the purchase of Whole Foods, Amazon added Safeway, Kroger, Aldi, and other grocers to its roster of competitors, while Amazon Studios competes with Warner Brothers and Columbia and Disney and everybody else who makes filmed entertainment.

And while they're not shown in the diagram, Amazon also competes with more companies in even more industries. Their self-publishing business competes with HarperCollins and Hachette and Macmillan, while Amazon Music competes with Apple and Spotify and Pandora. Amazon has even taken on Etsy with Amazon Handmade, and more are sure to come. In fact, it's hard to think of any other business in history that's chosen to compete in so many diverse markets at once.

Becoming a conglomerate rather than staying within an industry has some well-known challenges. One of them is losing focus: What is Amazon's core competence? Another is brainpower: No matter how good Jeff Bezos is (and he's clearly really good), can he hire and retain top managers who can successfully compete with the top people at every one of Amazon's competitors?

But for AWS in particular, Amazon's role as a broad conglomerate brings some special challenges. AWS is a platform, which means that its success requires other companies to build on it. Yet who's going to build on a platform offered by a company that's also a competitor? AWS is no longer the only cloud platform game in town (as it was when Netflix chose it), so why would any company that competes with Amazon in any area choose to give them money by building on AWS? This simply isn't rational. In fact, I have to believe that if Netflix were starting today, they'd pick somebody other than AWS for just this reason.

These conflicts are already starting to appear. The Wall Street Journal has reported on Walmart's efforts to get its partners to avoid AWS, and as Amazon enters more businesses, we should expect these challenges to increase.

And even if Amazon doesn't compete with a firm today, who's to say what might happen in the future? For example, entering the financial services market could make sense for Amazon, given the firm's incredibly broad customer base. This would immediately make them a competitor for thousands of banks and other financial services firms. Because it's hard to see a logical bound to the markets Amazon might enter, almost any business leader could one day wake up to an announcement that he or she has a new and powerful competitor. If this leader has already chosen to build on AWS, which is itself quite profitable, they're now in the position of giving their new competitor more money to use against them.

Amazon's ability to diversify successfully into so many areas is impressive; Bezos just might be the most successful business leader alive today. But choosing to become a conglomerate has downsides, too. One of them is that some number of potential customers are likely to shy away from AWS just because they don't want to help fund a competitor.




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