Amazon founder and CEO Jeff Bezos has made a number of puzzling moves lately, business deals that have left analysts struggling to understand how they will ever make money. Chief among them was his decision to buy the Washington Post, a purchase that made many media watchers hopeful that he had thought up a revolutionary new model for profitable journalism. But, a year later, the results are mixed, and his most aggressive move so far with the Post was to develop an app that will come pre-installed on new Kindle Fires.
Amazon Prime is another example. For roughly the price of a Netflix subscription, you not only have access to a wide library of free shows and movies, Amazon has aggressively developed its own programming and dropped $300 million to get access to old HBO shows. What’s more, for that same price you also get free, two-day shipping for all Amazon orders. The profit margin on that monthly subscription cannot possibly be substantial.
But there’s another corporate behemoth that has moved aggressively into new product categories without any near term plans to monetize them: Google. Google Drive doesn’t charge anything to the vast majority of its users (though it does have paid business versions). Google Maps sells no ads. Neither does Google News. Its executives have hinted that it may never place ads on Google Plus. Android, the most popular mobile operating system, is free to install. Chrome? Same thing.
But there’s a reason that Google pours billions of dollars into creating products that have little monetization potential, and it isn’t because the company is feeling charitable.
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In a brilliant 2011 essay titled “The Freight Train That Is Android,” Bill Gurley explained how these free products are meant to do one thing: protect Google’s lucrative search advertising business:
So here is the kicker. Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.
How does this apply to Amazon? Let’s say that a well-respected brand like Netflix decided it wanted to move into other kinds of content besides movies and television. Like, say, ebooks. Suddenly the Kindle Store, and Amazon’s vice-like grip on the ebook industry, is under threat. Or what if personal food delivery apps like Seamless decide to expand their product offerings? Then it may start eating into Amazon’s e-retail offerings. And if the Washington Post app and Amazon Prime’s video offerings can sell a few more Kindle Fires, then he’ll have a more direct line between the customer and the Amazon ecosystem of products. By encroaching into the spaces of other industries, Bezos keeps those other industries from finding cracks in the walk with which to encroach on his main cash cows. And once he has firm moats around his main profit castles, he can start increasing the price on those castles, capitalizing on competitor-free profit margins. The more power he holds over the ebook industry, for instance, the more authors he can direct away from traditional New York publishers and into Amazon’s internal publishing platform, where Amazon takes between a 30 and 70 percent commission on all sales.
Seen this way, Bezos is more concerned with future competitors who are nipping at the edge of his margins than traditional retail companies trying to move into his space. He’s cornered the e-retail market, now he’s simply scorching the earth around it.
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Image via Mashable