Amazon’s playbook for crushing startups


This video was sponsored by Skillshare I have a link for you to try them out for free So hang out until the end of this video In 2013, a Silicon Valley startup called June was founded The company was one of the first to develop a smart oven, which could be controlled over Wi-Fi, had a screen for recipes, a camera for checking out your food from anywhere, and eventually integrated with Alexa, so you could control it with your voice And by smart device standards, June Ovens were a success story The company behind them became a market leader and raised four consecutive rounds of funding from investors like Slow Ventures, Eclipse Ventures, and, in 2018, Idea Amazon Alexa Fund, Amazon’s own venture capital division Then just one year later, Amazon launched its own smart oven An oven that would have Wi-Fi connectivity, voice controls using Alexa, but would cost half as much as June’s ovens did The startup suddenly found itself in direct competition with the world’s largest retailer, the owner of the Amazon Alexa platform, and its direct investor, who it has to report to regularly with its own financial information The story of June is almost comical, but it is not a unique one Amazon launches hundreds of products every year, and, over time, has developed a very elaborate playbook for crushing competitors with them So, in the 58th episode of the Story Behind series, I’d like to walk you through that playbook Real quick before we start, if you want to see more in-depth analyses of tech companies, especially from a business perspective, consider subscribing to Tech Altar Step 1 in the playbook is a decision: Who should Amazon crush next? Should they make a smart light bulb, a smart thermostat, or maybe a smart oven? Good decisions are based on data, and Amazon has better data than any company in the world available to them for free They know how many people on their platform search for any given product category They have accurate and historical data about the prices and sales volumes and can see how price-sensitive consumers are in a particular market They see whether customers react to discounts, they see how challenging logistics are for any given category, and they see how concentrated a market is A concentrated market would mean there are a few dominant players that would presumably be expensive to compete against They have this “treasure trove” of data on almost all product categories in the world So they know exactly which ones are ripe for disruption In fact, I bet they actually have bots that go through all the categories and flag promising ones, like smart ovens, automatically for them Once Amazon has picked the right categories, it is then ready to move on to stage 2: Creating the product itself, which more than anything, requires money Money to pay world-class engineers and designers to develop a product, and money to finance the manufacturing or the sourcing of it And Amazon is unique in just how much money they have freely available for this very thing at any given time Its biggest source of free cash flow is its e-commerce business, but not because it is hugely profitable Like most retailers, its margins here are thin, somewhere in the low single digits But unlike most retailers, Amazon has such a dominant position that it can force suppliers to accept terms that are so bad that Amazon actually gets money from customers about 18 days earlier than it has to pay their suppliers They just tell their suppliers that they’ll get their money later on, and they can suck it up if they don’t like it And because suppliers often don’t have much of a choice, Amazon ends up with about 18 days worth of cash from their e-commerce business lying around at any given time Some of their other businesses, especially Amazon Web Services, which half the internet runs on, have also grown to be quite large And those, unlike retail, actually do have fantastic margins, which further add to the giant pile of free cash flow This pile of cash means that, while competitors might have to take loans and pay interest on them or find money in some other expensive way, the cost of capital to Amazon is almost zero, a huge systemic advantage And once they’ve developed their products with all of that cheap capital, it is then time for stage 3: Selling it And I’m not going to surprise anyone here by saying that Amazon, of course, has quite the competitive advantage when it comes to selling stuff See, a competitor, like June, would have to make a tough choice when selling their own products They could either build up their own webshop and sell to consumers directly, where they’d have to maintain the store and constantly buy ads from places, like Google and Facebook, to drive traffic to it, or they could sell on Amazon, where they would have to give Amazon a cut of the transactions and, on top of that, also pay for Amazon ads to be promoted on the platform Either choice would cost June a ton of money, especially when Amazon knows it has leverage, keeps pushing advertising prices up, and has often been caught playing dirty, too Like when a seller discovered that they paid Amazon for the sponsored placement, which Amazon then overlaid with its own cheaper product, anyway Uh… Yeah That’s Jeff Bezos right there living the thug life 🕶 Anyway, unlike June, Amazon, of course, would have no trouble getting its products listed on the world’s most important online store or getting those products featured on the front page with banners and in other preferential locations for free, which, once again, gives Amazon a huge advantage Now, in order to sell, of course, all products need to have a price, and that takes us to stage 4 in the Amazon playbook And we’ve already discussed how Amazon can get perfect market research, huge R&D budgets, as well as massive sales and marketing advantages for its products essentially for free, while competitors have to pay loads of money for each of these So, of course, Amazon typically has an easy time undercutting competitors on price But, there is more Unlike most startups, and especially unlike most hardware startups, like June, which constantly need to prove that they can, at least theoretically, sell their products at a profit, otherwise, investors will not give them more money for the next financing round, and they’ll go bankrupt Amazon’s products often don’t need to turn a profit Either not right away or, sometimes, not at all For a start, Amazon has deep pockets, can artificially keep prices down until the competition dies out, and then create a monopoly for itself On the top of that, Amazon also often doesn’t think in single products It thinks in ecosystems Selling a Kindle at the loss is fine because Amazon will make up for the loss in revenue from ebooks Selling an Echo at a loss is fine because Amazon will make up for it in Amazon Music subscriptions, Alexa ads, and Amazon Prime purchases And Selling an Alexa-powered smart oven at the loss is fine because its users will get a Prime membership, shop for groceries on Amazon Fresh, and will never switch to Google Assistant at home If it can’t control their appliances Amazon can treat some of its hardware as a customer acquisition tool Selling it cheaper means it brings more people into their ecosystem It’s similar to how Xiaomi often prices their phones at a loss, but then still manages to make money, which I’ve explained in a video you can see somewhere here But beyond that, Amazon can afford low prices for one more very unique reason: They have, over time, uniquely trained their investors to accept low profits Compared to Apple, for example, who has margins hovering between 30 and 50 percent, Amazon’s margins are in the low single digits, and Jeff Bezos has artificially kept them low for decades and has proven for that to be the winning strategy By looking at this chart from Recode, it’s clear that even as Amazon’s sales and free cash flow are increasing at incredible rates, their profits remain almost non-existent That’s because, essentially, every time Amazon has a spare dollar, instead of keeping it as a profit, it spends almost all of it on future growth engines like building new warehouses or developing a new Alexa-powered smart oven With almost any other company, investors would revolt against this I mean, no profits for almost the entire existence of the company? That’s a very clear signal that something is going wrong with the company, right? Except, not with Amazon By proving time and time again that its aggressive bets like AWS, for example, do pay off eventually in a huge fashion, Amazon has convinced its investors that they should prioritize long-term growth over short-term profitability, as well And so, Amazon losing a bit of money on a smart oven to drive competitors like June out of the market while buying up a large and loyal Amazon Fresh grocery shopping user base is exactly the kind of thing investors put their money into Amazon for And that’s the PlayBook With an unfair advantage in access to information, capital and sales channels, plus, strong ecosystem plays like Prime and Alexa as well as a lack of pressure from investors to show short-term profitability, it’s no wonder Amazon is one of the scariest competitors on Earth And while June can’t publicly say that they are scared to death of this new competitor, because that will scared their investors and their consumers, they sure as hell should be scared Now, I always find it understanding what exactly investors want from a company, at any given stage, really helps us understand what companies want And to understand how investors think, I recommend watching these fantastic courses on Skillshare They were made by my former colleague Jordan before he left the Business Casual channel, and they are called “Investment 101” He starts by explaining the basic of stock exchanges and goes all the way into breaking down what metrics real investors use to judge the value of stocks, like those of Amazon, for example It’s the perfect combination of material that is full of information but not overwhelming and you can watch both of these courses, as well as any others from Skillshare’s library of thousands of courses for free for two months by claiming your special free trial at skl.sh/techaltar14 If you decide to stick around after the trial, it’s a very reasonable ten dollars a month So check them out, and I’ll see you in the next video

100 Replies to “Amazon’s playbook for crushing startups”

  1. Companies like these scare me more than any AI:

    I know how AI works, it needs to be trained, it doesn't work like normal neurons, it's hard to configure them, they suck at learning some things like that 1587 is more than 1578, so they are bad at decision making. They are just gradient descent based optimizers. So if there is no revolution if how the AI works it's not going to do anything unexpected and go "rogue".

    Companies like Amazon, on the other hand, control the markets and can function even if everyone is poor. These huge companies make few people very rich, but most of us very poor. I really don't know what will happen when this reaches a breaking point and we can't sustain these companies because we all have gotten really poor and few who own them have become very rich.
    Will there be a revolt for communism?
    Will these companies share just enough wealth to sustain themselves?
    Will they destroy the Earth to provide cheaper and cheaper stuff for ever-poorer consumers?
    Will they put the breaks on sucking every last dollar out of us when their data analysis will say that we are on the verge of collapse?
    Can democracy exist when about each of the top 10 companies in the World is more powerful than any country?
    What will they do when they have defeated all competition, but can't provide enough jobs to sustain themselves?
    Will we all work for Amazon?

  2. Amazon is the company that needs anti trust law enforcement most. It is the judge on a soccer while it is also a player – how fair can it be when it comes to the Amazon marketplace? In fact this is the reason why made in American is dead. Amazon has its Amazon basic brand product made in Asia, while using all the strategies to kill companies that are practicing made in the US. It is the monopolized Internet Evil.

  3. What is Amazon kids? Say it with me now…. a MONOPOLY! pretty sure the US has laws against those, but oh well, Congress is bought out by them anyway, just like Google, facebook, and the rest of the tech monopolies.

  4. Could you imagine having all data on your competitor before they even know you're in competition. Damn. This is dishonest at most, unethical at least.

  5. Lesson learned: don't take funding from or sell on Amazon's platform. Google and FB ads are starting to look a lot more attractive…

  6. While I like your videos a lot, something I hate about them is the Background Music, please KILL the background music (#KBM) it is very annoying and unnecessary. Two things to bear in mind: your video’s main content is your voice which is conveying the information (and reinforced with the graphics) so you could think of your video as an audio only recording, so your voice should be as clear as possible, especially since you have an accent and this can make it more of a strain to understand what you are saying, so covering the soundtrack in annoying competing Muzak is not a good idea. Otherwise well done!

  7. Dirty bastards! I was a reseller for a drone company and when they started out during mid 2012 they were nobodies, a bunch of chancers with a good idea/product which they had no idea how to sell or even market. Then myself, and others in various territories, around the world set up companies to demonstrate, market, and sell their products. It all went well and many of us received huge amounts of media attention, sold loads of their products and help the supplier grow to a point where they are now one of the largest privately owned drone companies on the planet. I can't even begin to explain how stressful it is to sell a product for a company and yet have to compete against the actual company you are selling for because they would tender for the same deals and undercut you by loads on pricing, even though we were never greedy and played it straight. But… what they did was use us, the people who helped build them up, to reach a point where they offered tech support only through them. This way meant they got in bed with the contacts and guess what? They cut all of our contracts without a day of notice and went direct, offering a 20% discount (our cut of any sales). The biggest scumbags I ever did business with and Amazon sounds like they employ just as many cut throat tactics, it's morally wrong on every level but these sons of bitches just don't care. At some point they will get hurt, maybe the top crew make millions or more but it's the small guys who get shut down, it's criminal.

  8. It's unbelievable. How can they do that !? They sell the oven at half price to retail customers! And yet it is obvious that a retail customer would prefer to buy an oven twice as expensive. Amazon is evil. Socialism will fix it all. There will be no ovens in stores and the problem will disappear. Then we will all live happily in socialism. Bezos and clients and creators of start-ups.

  9. I think an independent community should manage data servers like United Nations or something. Coz proprietary data centers are mostly responsible for privacy breach! 😑😤

  10. vote for Bernie Sanders if you want the government to actually enforce laws, that are already written btw, to break up amazons monopoly

  11. You know, as dudgy as some of the stuff amazon does is, I kinda have to respect them for getting investors to think long term.

  12. This in the long term will kill innovation by the tinkerer. Simply not worth expending ones mental and physical capital just to get screwed by a corporation.

  13. This how corporations work! And ironically we support them. A product may be selling for 20$ at a local store (On Amazon it will be selling for 18$) although paying 2$ more will not make us bankrupt but that 2$ is life for the local business. By choosing big corporations we are just putting millions into pockets of already a millionaire!
    I’m not against any big corporations but many of them are down on ethical standards! Competition is good but the competitor should be equally worthy else it not called competition it’s domination.

  14. Something u forgot to mention, i dont know about any other product, but if u want to add skincare to amazon they ask for reciepts of your purchase, so if u buy direct from manufacture they have your manufactures details, kill 2 birds with 1 stone. 1 they dont have to do countless hours to find manufactures etc (u done all the donkey work), 2. Once they got your recipts an suppliers details they just go directly to them. So while u doing countless dog work, amazon sit back an wait for you to come to them, and they have alot of good sheep and cattle who herd themselves to amazon.

  15. I think the most problem isn't amazons marketing at all, there are so many scamming websites out there, that u have to expect to lose your money if you buy from a probably unknown site. Which makes it even easyer for amazon.

  16. 2020 presidential candidate Andrew Yang has a Plan to tax Amazon and other tech companies that they can't get away from.

  17. When finger spinner starts to be popular in the US, a chinese company ships a container of spinner to US and sell it online. Like always, they had to ship their goods to a Amazon warehouse. During this process, something happened and Amazon claims that this batch of products was "missing". And they paid the owner the full price of those products. And later amazon start to sell it's own finger spinner with much higher price. And guess what? They looks just the same as the "missing" products of the chinese company.

  18. If Amazon already has enough money from its aws(awful web services) why does it need to take down other businesses that are smaller?

    Wouldn't it be better to just work with the smaller businesses and incorporate Amazon features into the products?

  19. I work of a simple formula x > 150 then y = "bad" where x = number of employees the company employs and y = the likely outcome with having to deal with this company. 150 by the way is the number of people at any one time that you can be expected to know as friends, work colleges and acquaintances.

  20. This is disgusting…doubly so when you realize they also avoid their fair tax burden in ways smaller non-multinationals can't, and also pay and treat their employees so poorly they aren't able to support themselves and are dying at work…

    This is why I avoid them as much as possible, and have only ever made one Amazon purchase for a rare item I couldn't otherwise get, and even then I felt dirty as shit!

  21. Amazon is hiring literally without interviews right now for delivery drivers. Just apply and start. Wtf. 😂😂😂😂

  22. Amazon has been doing this for a long long time and it still has to look up to Apple who became a Trillion dollar company 1st and paid a dividend at the same time.

  23. They have access to that data because those other companies give it to them by way of selling on their platform and getting their funding.

  24. So basically, all the people telling you to be an entrepreneur aren't telling you that Amazon is waiting in the wings to eat you.
    Yeah sure, you get paid for your company, but why does one company have to own everything? It's so demoralizing.

  25. in my opinion, this is what companies from china do or from other countries do who are able to to make products much cheaper

    as for amazon, it is logical (though not necessarily morally good) if it would adopt this style because if it would not do so, it would lose its own company from other competitors like ebay and alibaba employing this style

  26. Why are you guys so upset? I thought you liked capitalism – this seems like the logical conclusion. Bend the knee or get conquered.

  27. Good, less competition in the world of superfluous smart devices means product quality or cost is worse for the consoomers who buy that trash.

  28. Why is that shit Amazon is doing not illegal? Anyway, waiting for the first company to say to Amazon for a collab: Please go fuck yourself!!

  29. Everyone seems to forget Amazon literally was at one time, just bezos running to and from bookstores buying books and packaging/ shipping them himself.

  30. Remember when Beaver counted all the jellybeans in a jar not knowing there was a softball in the middle of the guessing jar? 🍭

  31. Amazon is such a nasty business, it's crazy. Glad to be in a country that doesn't allow the crazy practices that they pull, even if that does mean I have to look around a bit to find the stuff I need.

  32. Antitrust laws correctly applied would be great…

    Only problem with that is, the west would lose most of it's big industry, all its main banking sector, its major medical manufacturing, most politicians (caught up in the scandal) – and of course most of the legal industry itself – for monopolizing a simple affair which by rights (and numerous laws) should be a simple and quick "judgement by peers".

  33. I get that Amazon's ecosystem makes things pretty easy for it, but would I call it 'unfair'? No. More like 'lucky them'.
    I do find it rather odd that they copy other products so obviously. What is worse… Companies they are invested in as in this case.
    I do not know much about patents and stuff, but at the very least… It's not what you would call super admirable. It smells a bit.

  34. I don't think the oven comparison is really fair – there are ovens more comparable to amazon's at $300. June has way more features, and clearly attempts to position itself as the top-of-market luxury option.

    I'd be super curious about the legal constraints being an investor puts on being a competitor, if any

  35. Amazon web services is actually by far the most valuable party of the company. I would say at least 2/3. It generated $7.2 bn of operating income in 2018, vs $5bn for everything else. And that $7.2bn is probably valued at a higher multiple since it is SaaS revenue.

  36. There is one thing missing from your analysis of the situation. If amazon wanted to kill the startup why would they invest in it at all ??? In this case it is more likely that june is actualy making the amazon brand smart owen. While the amazon owen will be most probably locked to amazon ecosystem the june's one will be compatible with other smart ecosystems.

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