Amazon Moat Mentality Approaches Business Differently

Amazon, one of the top tech movers of the past two decades, recently opened their concept Amazon Go store in Seattle, Washington. Dubbed as a grocery story of the future, this partially automated futuristic concept store allows customers to buy several products with no need for a cashier or checkout counter. A person simply takes an item off the shelf and it is automatically added to their virtual shopping cart, so they can come and go anytime they want – a bold idea that is bound to shake up the industry.

While this store officially opened to the public only in January, it was actually already open to Amazon employees since 2016. This two-year time period let the e-commerce titan test several technologies such as sensor fusion, computer vision, and deep learning algorithms before the prototype location was unlocked to the rest of Seattle.

Their “Just Walk Out Shopping” experience is just one of Amazon’s countless businesses that allowed the tech giant to build massive moats around their innovations, allowing them to not only execute revolutionary products and services, but also lead in whatever industry they try to penetrate.

Leading for the Long Term

Established in 1994 as Cadabra by Jeff Bezos, Amazon went public in 1997 originally as an online bookstore that later diversified into several industries and services. Just how did Bezos create a company that boomed into a global household name with over half a million employees in just two decades?

Amazon surpassed Microsoft in market value at $702 billion on February 14, 2018, claiming the third spot, behind only Google and Apple, among the largest US companies. The Seattle-based group’s surge bolsters its position as a global tech giant, as it continues to expand its operations to include artificial intelligence, cloud computing, package delivery, consumer devices, entertainment and other businesses.

In several interviews, Bezos has mentioned that he tends to invest in things with the long-term result in mind. He plants proverbial seeds that may take years to bear fruit, a risky move that not many entrepreneurs are willing to undergo. Most companies take a conventional two or three-year approach, but Bezos is okay with allowing something to bloom for longer than that.

“If you’re long term oriented, customer interests and shareholder interests are aligned,” he explained. “In the short term, that’s not always correct… Some of the things that we have undertaken I think could not be done in two to three years… Basically if we need to see meaningful financial results, …some of the most meaningful things we’ve done we would never have even started.”

He cited many of his successful investments, such as the popular ebook reader Kindle, Amazon Prime, and Amazon Web Services, among many others, as just some of those. He also revealed that he takes other types of unconventional moves.

“Our approach to our hardware Kindle devices, Kindle Fire and our Kindle readers, is to sell the hardware at near breakeven, and then we have an ongoing relationship with the customer where they buy content from us– digital books, music, movies, TV shows, games, apps,” he revealed. “The reason that we like that approach is because we don’t make $100 every time we sell a Kindle Fire HD, since it’s near breakeven. Instead of making a bunch of money, then, we’re happy if people keep using our products. We don’t have to have you on the upgrade treadmill.”

Misunderstood but Effective

Bezos has always used unusual approaches to his bold businesses. In fact, even during the start of his Amazon career, a customer wrote to him saying he does not understand his own business. “You make money when you sell things. Why do you allow these negative customer reviews?” the letter read. When Bezos got that feedback, he thought it was not true of Amazon. “We don’t make money when we sell things – we make money when we help customers make purchase decisions,” he said.

He refers to his often misunderstood approach as an “explorer mentality,” as opposed to a “conqueror mentality” prevalent in many businesses today. They also focus on customer experience, which they refer to within the company as “True Customer Obsession,” an engagement strategy that allows them to consistently outperform many other retailers.

Amazon is very much open to spending a lot, albeit wisely. Ben Thompson, owner of well-known tech blog Stratechery, analyzes that Amazon’s willingness to spend is what truly differentiates them. Compared to most other tech companies, Amazon’s core is not just on software. He assessed that while spending, in the short-term, seems risky and painful – the exact reason most other software companies avoid that approach; however, it lets Amazon create such massive moats around their businesses, receiving the greatest possible returns on their bold investments.

Moat Mentality

Amazon’s customer focus and emphasis on long-term perspectives has permitted them to become the authority in whatever bold business they come up with. They have a moat mentality that pretty much separates them from the tech herd, either through smart investments or daring acquisitions.

Such an example is their 2012 purchase of Kiva Systems, costing them a record $775 million – their largest acquisition to date. Kiva built robots for Amazon Fulfillment, which baffled analysts because Kiva already had a proper customer base to begin with. In fact, many say Amazon could have just bought Kiva’s robots instead for a whole lot less. So why did they pay for 8 times Kiva’s revenue? Simple. Amazon was not interested in sharing what Kiva had to offer to their competitors – they took up everything, creating a huge gap in the market. What many would say is a “wrong” move when viewed in the short-term perspective, was actually a brilliantly bold effort in the long run. They initially spent millions of dollars at first, but were able to create and improve their fulfillment centers better than any of their competitors.

Thompson wrote in his tech blog that Amazon is not likely to license out the tech Amazon Go uses either. “Make no mistake, that is exactly what a company like Google would do (and as I expect them to do with Waymo), and for good reason: the best way to get the greatest possible return on software R&D is to spread it as far and wide as possible, which means licensing. The best way to build a moat, though, is to actually put in the effort to dig it, i.e. spend the money,” he explained. As such, he believes the company took big, painful risks but have proved them effective.

Another notable moat they have created is that of the voice-controlled artificial intelligence (AI) personal assistant service. Their Amazon Echo smart speakers, in tandem with the AI assistant named Alexa, is the first virtual assistant that is years beyond its competitors. Today, devices like Google Home and Apple HomePod exist, but Amazon’s reputed Echo and Alexa are still ahead of the game. Even fellow tech giant Microsoft is trying to get in with their Cortana AI assistant software, made for other gadgets rather than for an exclusive Microsoft product. Interestingly, it is compatible with Alexa for a future release, thus further establishing Amazon’s competitive advantage.

Applying bold ideas and new technologies lets Amazon gain and maintain their edge. Their customer-centric style is a business model that many other businesses can only either learn from, or end up competing with.

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