Amazon, already a heavyweight in Cloud service providing, is joining the IoT game with Amazon Web Services IoT platform (AWS IoT). What is their strategy and how will they stack up against major competitors?
■ by Simon Torrance
Steve Jobs used to quote the great ice hockey player, Wayne Gretzky, when he said “I Skate to where the puck is going, not where it is now”. Recent analysis shows that the puck is most definitely heading to the IoT. There’s an $8 trillion market in IoT-enabled business and consumer services over the next decade for those companies clever enough to know how to address it. And Amazon is certainly one of those companies.
Werner Vogels, Amazon’s CTO, told analysts about the ‘Amazon Growth Flywheel’, a concept that was apparently created on a napkin in a café in Seattle around 2000 by Jeff Bezos and some of his execs as they grappled with how to redress the flattening growth curve of their online retail business.
The ‘Bezos Napkin Diagram’, as it’s also known, summarizes how Amazon conceives of its business and the role that new developments, like the IoT, play. It started with a foundational question: what do our customers really want? They felt that the answer was ‘choice’ and ‘selection’ from one source. That drives customer experience, which drives usage and traffic. Then, back in 2000, they paused…
Those who recognize the value of being ecosystem enablers will be the winners
Was there an alternative way for Amazon to deliver choice and selection without having to source and manage their own inventory with all the risk that entails? Andwere there others who would be interested in leveraging Amazon’s traffic and infrastructure?
The “a-ha moment” came when they realized that third-party merchants
- potentially competitive vendors
- could not only satisfy customers” demand for choice, but also would be happy to pay to take advantage of Amazon’s advanced e-commerce infrastructure
By sharing their “platform” with others, Amazon could also reduce their total cost structure over time, which could enable them to reduce their prices, which would drive customer experience, leading to more traffic, more merchants, more selection and so on. Werner Vogels told the analysts that since Amazon implemented this plan, it had become two businesses: an online retailer and a platform business, of which the retail part of the business was a customer in the same way as the 3rd party merchants.
Taking the concept further, Amazon realized that it could white-label its platform to other retailers and, more recently, make its advanced cloud platform (now called AWS) available to any enterprise. Amazon is now the master of the platform business – making its infrastructure available to other people to enable them to run their businesses more effectively. And their move into the IoT is part of the same strategy. Rather than trying to create end user services, it’s easier and more scalable to enable others to do so. If your platform can be used by an ever expanding ecosystem of producers and consumers, then you create what economists call self-reinforcing network effects. The more producers there are, the more attractive it is to consumers, and vice versa. You make it easy for people to use your platform, mine the data of their usage to optimize it, charge people to use it, and identify more opportunities to provide your own services to your ecosystem participants.
Amazon is not alone in deploying this model. Alibaba, Apple, Google, Microsoft and 170 other powerful “digital native” organizations operate under the same business model and collectively are now worth over $4 trillion.
Amazon has been so successful with the model of leveraging its infrastructure and resources with 3rd parties, that AWS now generates $11bn in revenue, and is growing at 45% per annum, as more and more traditional enterprises look to transform the way they consume IT.
The next phase on from this is to help enterprises transform more than their IT. And this takes us back and the $8 trillion IoT-enabled services market opportunity – where the puck is going.
Traditional businesses in all sectors are under pressure from the global economic slowdown, which is likely to persist for the foreseeable future. Add on to that competition from new digital disruptors, then the need for companies to innovate their core business model – just like Amazon had to do back in 2000 – becomes more intense. Product companies are looking at how to become service companies to deepen their relationship with customers beyond the purchase of the product. B2B companies – like car manufacturers – are looking at how to move to direct B2C relationships. Companies in all sectors are looking to add digital services to their portfolios. In parallel, governments are looking to tackle the issues of urbanization, climate change, and lower productivity caused by aging populations. They need solutions to dramatically reduce costs and create more positive outcomes for their citizens in areas such as healthcare, traffic management, energy consumption, food security – to create “smart cities” which leverage data and the IoT.
So this is the market that Amazon is preparing for. Amazon Dash, Dash Buttons and the always-listening Echo device, are examples of experiments that it is undertaking to understand how special-purpose IoT devices can support not only their retail business but also their platform business.
AWS and its IoT elements provide the processing power to make their platform solutions and tools for enterprises more powerful: to enable lots of companies and product developers to design, build and operate IoTenabled services. The IoT device is the “tip of the iceberg” in creating an end-to-end solution. The IoT value chain also covers connectivity, big data, algorithms, and business processes. As more and more IoT Devices get introduced, a nore data is generated. These devices and services can take advantage of AWS’s infrastructure.
Back to the flywheel: the more demand for its infrastructure, the lower Amazon’s costs which, in turn, makes it more attractive to companies. AWS’s IoT-enabling products include AWS Redshift, AWS Kinesis, AWS Machine Learning and, last year they acquired 2lemetry, a cloud-based application-enabler platform in order to provide M2M capability. These products support the growing number of companies and developers looking to build IoT-based services. They support an AWS-IoT flywheel, which is the real motivator for Amazon.
Amazon’s biggest competitor is probably Microsoft, another platform company. The Microsoft Azure IoT portfolio covers a lot of the same ground as the AWS proposition: gateway, cloud, value-added tools for analytics, and so on. The issue for AWS is that it that it lacks a full complement of components to offer truly end-to-end IoT solutions to enterprises. Microsoft also lacks a full portfolio, but is much more experienced in serving the enterprise market.
Jeff Bezos, critics believe, is right to say that we are still at “day one” in terms of the impact of the Internet on society, and that his company is still in the “early days” of its business lifecycle. At its event in Davos in January this year The World Economic Forum announced the beginnings of a Fourth Industrial Revolution: “We stand on the brink of a technological revolution that will fundamentally alter the way we live, work and relate to one another – a fusion of technologies that is blurring the lines between the physical, digital and biological spheres.” Amazon, and other organizations which recognize the value of being ecosystem enablers, rather than just end-user service providers, will be the winners in this brave new world.