The Big Moat: How Amazon, Netflix and Google Stay Giants

Earlier in 2013, Slate writer Matthew Yglesias summarized Amazon in a way that quickly went viral, as it reconciled the company’s popularity with its willingness to eschew profits in a particularly pithy way: “Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers.”

According to a blog posting by former Amazon employee Eugene Wei, however, Amazon is immensely profitable—it just prefers to plow all that earned cash into building out its infrastructure, rather than leave it on the proverbial table for Wall Street to drool over. While Amazon does lose money on some products, such as certain electronics items, it makes a profit off a heady combination of retail sales, commissions from third-party sellers, and (most likely) renting out its IT infrastructure to companies in need of storage and computing power. It plows that money into building new fulfillment centers for shipping physical products, as well as servers and other hardware for its burgeoning digital services.

Wei caps his posting with an analogy comparing Amazon’s massive business to an ultra-small one:

“If you sell a glass of lemonade for $2 and it only costs you $1 to make it, and you decide business is so great you’re going to build a lemonade stand on every street corner in the world so you can eventually afford to move humanity into outer space or buy a newspaper in your spare time, and that requires you to invest all your profits in buying up some lemon fields and timber to set up lemonade franchises on every street corner, that sounds like a many things to me, but it doesn’t sound like a charitable organization.”

More to the point, it would be extraordinarily difficult—if not impossible—for an e-commerce startup to come along and challenge Amazon on its own terms. Doing so would require frightening amounts of capital and some technological leapfrogging, not to mention a substantial bit of luck.

But Amazon is the underdog when it comes to streaming video online, an area where Netflix reigns supreme. According to The Atlantic Wire (basing its numbers off data from Sandvine, which builds broadband technology), Netflix had swallowed up some 32.3 percent of North Americans’ download traffic by May 2013. Netflix has roughly 1 million more subscribers than HBO, and streamed more than 4 billion hours’ worth of content in the first quarter of 2013.

Netflix’s position is a bit tenuous—it needs to spend lots of money on securing content, and a few missed deals (combined with some poorly-performing original series) could translate into a customer bleed-off. Hypotheticals aside, the company has leveraged size and technological innovation to build a sizable “moat” against competitors, just as Amazon has done in e-commerce. Like Amazon, Netflix has turned storing, analyzing, and delivering data into a fine art; matching it would take an army of people trained in building custom tools for processing massive amounts of unstructured data, for starters, along with algorithms that can “understand” user behavior and preferences. That’s not something you can build overnight, especially when Netflix has the resources to quickly crush any burgeoning effort not run by another skilled giant (such as Amazon).

Not all such moats are dug with lots of money. Google’s Android operating system enjoys a rapidly expanding share of the mobile-device market, in large part thanks to the search engine giant’s decision to give the software away for free. Manufacturers all over the world, anxious to push out an iPhone competitor at a time when it looked as if Apple would seize the entirety of the then-new smartphone market, seized on the chance to adopt someone else’s ready-made platform rather than expend the resources building their own offerings. Questions of ecosystem fragmentation aside, it’s clear that Android isn’t going away anytime soon—and no competitor, from BlackBerry 10 to Windows Phone, has managed to make much of a dent in its kudzu-like growth.

What are the lessons from this? Start early, expand as rapidly as possible, and make sure your technology stays ahead of the game.

 

Image: Netflix

Related