Amazon Strategy Teardown by CBInsights

Nov 1, 2017 | Publisher: Techcelerate Ventures | Category: Business & Jobs |  | Collection: Strategy | Views: 17 | Likes: 1

1 Amazon Strategy Teardown AM AZ O N ’ S BARRELING IN T O PH Y SICAL RE TAIL , FIN ANCI AL SER VICES , HEALTHCARE , AND AI - LED CO MPUTING 1 Seattle-based Amazon is doubling down on AI for AWS and the ecosystem around its AI assistant, Alexa. It’s seeking to become the central provider for AI-as-a-service. But it’s not leaving retail behind either, running grocery, book, and convenience stores across the US. Amazon is the exception to nearly every rule in business. Rising from humble beginnings as a Seattle-based internet bookstore, Amazon has grown into a propulsive force across at least 5 major industries: retail, logistics, consumer technology, cloud computing, and most recently, media & entertainment. Notably, Amazon’s $13.7B purchase of grocery chain Whole Foods last year shook up the grocery industry, highlighting Amazon’s increasingly deep push into brick-and-mortar retail. Of course, the company has had its share of missteps — the expensive Fire phone flop comes to mind — but Amazon is also rightly known for strokes of strategic genius that have launched it ahead of competitors in promising new industries. This was the case with the launch of cloud business AWS in the mid-2000s, as well as the more recent consumer hit Amazon found with its Echo device and Alexa AI assistant. Today’s Amazon is far more than just an “everything store;” it’s a leader in consumer-facing AI and enterprise cloud services. And its insatiable appetite for new markets means competitors must always be on guard against its next moves. As the United States’ biggest online retailer, the company accounts for about 4% of all retail and about 44% of all e-com- merce spending in the US. While the company has been publicly traded for more than two decades, its market capitalization has swelled in recent years. 2 Wall Street banks like Morgan Stanley expect Amazon to continue growing at a rate that no company its size has ever done before, estimating 16% average compound growth in sales through 2025. Morgan Stanley analysts have also set a price target at $2,000/ share — or a market capitalization exceeding $1T — within the year. If Amazon is able to satisfy these lofty goals, it will be “the most aggressive expansion of a giant company in the history of modern business.” Understanding the many-headed beast that is Amazon is no easy feat, especially because the company is so much less transparent than many its peers. As the New York Times reports, “[Amazon] isn’t just secretive, the way Apple is, but in a deeper sense, Jeff Bezos’ e-commerce and cloud-storage giant is opaque. Amazon rarely explains either its near-term tactical aims or its long-term strategic vision. It values surprise.” In this report, we dive into that “opaque” strategic vision, from Amazon’s investment and M&A history, to analysis of its patents, to initiatives across AI, media, AWS, and more. 3 Key takeaways Given Amazon’s enormous breadth, we won’t be covering every aspect of its business. But highlights from our analysis include: Amazon is growing more acquisitive. Amazon acquired 10 startups in 2017 — more than any other year on record. In addition to its purchase of Whole Foods, the company bought Harvest.ai, a cybersecurity player, GameSparks, a game development platform, and Blink, a developer of home security cameras, while also expanding geographically with its acquisition of Souq.com, a Middle Eastern e-commerce site. This acquisition-heavy year, in comparison to the company’s generally more conservative M&A history, could mean Amazon is shifting to a more proactive stance to fuel its AI and enterprise ambitions. Amazon’s next pillar is AI. In a letter to shareholders published in April 2017, Bezos wrote extensively about AI and machine learning as a focus when it comes to the company’s efforts to maintain its relevance and edge over its competition. Voice, virtual assistants, and natural language processing will con- tinue to be a focus for Amazon. But the company is also focused on AI-as-a-service, putting the basic tools of AI in the hands of its cloud computing and developer community. More than ever before, Amazon is aspiring to become a platform company. Amazon is going after healthcare. Its investment into cancer detection company GRAIL was a vote of confidence in genomics, which with its massive data and processing needs, will be a major area for computing. In addition, Amazon’s recent partnership with JP Morgan and Berkshire Hathaway to provide employees with better health insurance signals broader ambitions to upend traditional healthcare. Amazon is proactively creating a valuable ecosystem around its Alexa voice computing platform. Currently, the Alexa platform offers software development kits (SDKs) that allow third-party developers to build skills for the AI assistant and other manufactur- ers of hardware to integrate the Alexa assistant into their products. 4 Meanwhile, the Alexa Fund & Accelerator’s investments point to new interfaces — like gesture controls developed by Thalmic Labs — and new hardware category possibilities, as with GPS tracking companies Mojio and TrackR. In addition, Amazon continues to show interest in the mobile hardware market despite recent failures, with the Alexa Fund participating in a $300M Series B round to mobile phone developer Essential Products in Q3’17. More recently, Amazon has acquired two Alexa-enabled smart home security camera companies: Blink (acq Q4’17), which was acquired primarily for the energy-efficient chips used by its wireless security cameras, and Ring (acq Q1’18), which was acquired for its success in the smart doorbell market. Ring will continue to operate independently and will complement Amazon’s new delivery program, Amazon Key. Lab126, Amazon’s secretive R&D lab, is behind the company’s recent consumer tech hits. Is this the new Bell Labs or Xerox PARC? The secretive Silicon Valley-based R&D lab is behind hardware hits like the Echo and Kindle. And although it was also where the ill-fated Fire phone was developed, the lab is an often under-ap- preciated example of Amazon’s internal dedication to innovation. Amazon aims to grow market share in physical retail and CPG, as well as consumer goods in general. The company operates its own shoe line (The Fix) and apparel brands (Ella Moon, Good Threads, Paris Sunday) as well as consumer goods grouped under its AmazonBasics label. Amazon has also begun opening brick & mortar bookstores and recently launched Amazon Go, its cashier-less convenience store, with plans to expand the stores nationwide. But Amazon’s largest acquisition to date, the $13.7B purchase of Whole Foods, is the company’s most aggressive expansion into the grocery market and will introduce new opportunities for hyper-local distribution. Since the Whole Foods acquisition, Amazon has also started a restaurant delivery service that offers free delivery to Prime members. 5 Amazon’s search for its second US headquarters highlights the company’s economic muscle. Cities have aggressively competed to attract Amazon after the company announced a search for a city with the talent and entrepreneurial streak to host its second US headquarters. (Notably, Amazon also maintains a European Headquarters in Luxembourg, which is said to help the company avoid billions in federal taxes to the US government). The selected city will reap 50,000 new jobs and $4B in total investment. Rumors have circulated for months as to which city Amazon will call (its second) home. Austin, Boston, Denver, Fairfax, and Raleigh are all popular, while Atlanta is the favorite among CB Insights’ newsletter readers. 6 1 Background » History & funding » The three pillars » Structure & hiring 2 Acquisitions » Acquisition activity is on the rise » Largest acquisitions » Acquisition trends 3 Investments » Alexa Fund & Accelerator » Amazon corporate 4 Patent Data Analysis 5 Amazon Initiatives by Sector » Core business in e-commerce & retail » Transportation & logistics » AI & voice » AWS & enterprise cloud » Media & advertising » Hardware & devices » Other new business 6 Closing words Table of contents 7 At CB Insights, we believe the most complex strategic business questions are best answered with facts. We are a machine intelligence company that synthesizes, analyzes and visualizes millions of documents to give our clients fast, fact-based insights. From Cisco to Citi to Castrol to IBM and hundreds of others, we give companies the power to make better decisions, take control of their own future—and capitalize on change. 8 The CB Insights platform has the underlying data included in this report WHERE IS ALL THIS D ATA FRO M ? CLICK HERE TO SIGN UP FOR FREE 9 Beti Cung, CORPORATE STRATEGY, MICROSOFT “ We use CB Insights to find emerging trends and interesting companies that might signal a shift in technology or require us to reallocate resources.” TRUSTED BY THE WO RLD ’ S LEADING CO MPANIES 10 Background HISTORY & FUNDING Jeff Bezos, the company’s founder and longtime CEO, first hatched the idea for Amazon while working on Wall Street at the hedge fund and tech private equity group D. E. Shaw & Co. For a while, Amazon was a bootstrapped internet bookstore, funded by Bezos’ money and contributions from friends and family. In 1995, Bezos raised nearly $1M in small checks from 20+ local angels, with a typical check size of $30K – $50K. Among those angels, Nick Hanauer, Eric Dillon, and Tom Alberg (of Madrona Venture Group) were brought on as company advisors. In 1996 Bezos sought outside investment from John Doerr of Kleiner Perkins Caufield & Byers. In Amazon’s only round before IPO, KPCB invested $8M at a $60M valuation for a 13% stake. In 1997, Amazon went public at a $382M valuation. Just over twenty years later, as of February 2018, Amazon’s stock price is up over 88,000%, while its market capitalization hovers just over $735B. Over the past two decades, the Seattle-based company built an e-commerce-centric business that now appears to be at an inflection point. THE THREE PILLARS In a 2016 interview, Bezos said Amazon rests on 3 pillars: 1 Amazon Prime, which offers membership e-commerce bun- dled with elite digital media products. 2 Amazon Web Services, which leads the tech pack in cloud computing. 3 Marketplace, Amazon’s third-party seller business. Bezos has mentioned there are several new pillars in the works, but on the subject of how those will pan out, said to “ask him in 10 years.” Many newer (possibly “pillar”) initiatives — such as the Alexa platform for voice-enabled apps — align with Amazon’s core e-commerce business and are already beginning to pay dividends by enabling more frictionless commerce. Amazon’s customers 1 11 can already order and purchase items directly through Alexa, and Prime members can access exclusive discounts and content through the platform. Success in these newer bets has cracked open new opportunities and established Amazon’s position as the company top execu- tives are most eager to talk about. At the same time, Amazon must defend and build on its new businesses — something it can only do if it continues to innovate faster than rivals Apple, Facebook, Google, Microsoft, and others. To see how Amazon is stacking up to its peers, we analyzed the number of times top tech giants were mentioned during earnings calls. Amazon was mentioned nearly 3,000 times in 2017 – more than Facebook, Apple, and Microsoft combined. The sharp uptick in Amazon mentions highlights how the compa- ny’s success has begun to rattle companies across industries. In 2017, the companies discussing Amazon were an eclectic mix, ranging from CVS and Macy’s to Netflix and Oracle. However, the question still remains of whether or not the famously customer-obsessed Amazon can successfully transition to becoming a conglomerate with stakes in vastly divergent business models. Amazon’s newest offering with AWS is a business-to-business product, as are many of its newer tools and services, like voice and AI-as-a-Service. STRUCTURE & HIRING Presently, Amazon is comprised of over 100 business entities held across the world, many of which are affiliates of its 12 e-commerce and media businesses. Some subsidiaries — many of which are the product of acquisitions — focus on specific categories, like Audible in audiobooks, Whole Foods in groceries, or Zappos in shoes. Among these, Amazon has separate retail websites for the United States, the United Kingdom and Ireland, France, Canada, Germany, Italy, Spain, the Netherlands, Australia, Brazil, Japan, China, India, and Mexico. Across these 100 worldwide business entities, Amazon collectively employs approximately 560,000 people — nearing the collective population of Wyoming. Despite recent job cuts, which are rare for the company, Amazon claimed to have hired about 130,000 new employees in 2017, excluding employees of Whole Foods. The company also plans to ramp up hiring in the future, especially with imminent plans for HQ2. As of February 2018, Amazon has over 13,200 current job openings. AWS is the biggest area Amazon is scaling up: with more than 5700 job openings, AWS accounts for over 43% of all the open listings (compared to 33% a year ago). Fulfillment & Operations is the next-largest hiring area, representing nearly 13% of open positions (down from 19% a year ago). Other notable hiring areas are the Alexa Team, with more than 1130 jobs (9% of current open positions, 5% a year ago) and the Amazon Devices team, which includes the recommendation algorithm team MAKO, which accounts for over 5% of job listings (4.5% a year ago). While there are approximately 4,000 fewer job openings than there were a year ago, this could be attributed to a growing pool of quality candidates and improved retention for the company. 13 Acquisitions Amazon has earned a reputation as a conservative M&A player, but now the tide may be turning. ANNUAL ACQUISITION ACTIVITY IS ON THE RISE With 10 M&A deals in 2017, the company’s acquisition tally exceeded the previous record set in 2015, and far outpaced activity in 2016. The uptick in M&A is particularly notable given that the company has rarely had more than 5 deals per year. Looking at Amazon’s annual acquisition history, activity has grown since the dot-com bust, especially in recent years. That said, more acquisitive years are interspersed with years of conservative activity. While Amazon only spent $103M on acquisitions in 2016, M&A spending far exceeded $14B in 2017, which saw the acquisitions of Whole Foods ($13.7B) and Souq.com ($750M), the so-called “Amazon of the Middle East”. These recent acquisitions could mark a new approach for the company. It’s clear that Amazon is willing to spend, but only when it finds the right opportunity. As Nat Burgess, an M&A specialist at TechStrat, remarked, 2 14 “Amazon is a conservative buyer. They think long term and they don’t get seduced by high-flying valuations…. Amazon is unlikely to overpay for a high-flying, fully baked platform as the basis for the next dreamy business.“ The data backs up this idea that Amazon moves more cautiously in the M&A arena. Compared to its tech giant peers, Amazon is less acquisitive: its highest years saw 9 and 10 deals (in 2015 and 2017, respectively), while Amazon bought only 5 companies in 2016. In comparison, Apple has annually completed 8 – 14 M&A deals in recent years, while Facebook, despite trending downward lately, once hit back-to-back years of 14 acquisitions. Google is an outlier in M&A activity, having acquired 36 companies in 2014 — more than 7x Amazon’s 2014 total of 5. LARGEST ACQUISITIONS What exactly does Amazon look for in a potential acquisition? Jeff Bezos himself outlined what constitutes a must-have “dreamy business” in a 2015 shareholder letter: 15 “A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time — with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.” Notably, many of Amazon’s largest deals meet some or all of these criteria, proving to be capable of growth and durability in the long run. Amazon’s largest deals to date include Whole Foods ($13.7B, 2017) shoe retailer Zappos ($1.2B, 2009), smart doorbell and security camera Ring (~$1B, 2018), e-sports streaming site Twitch ($970M, 2014), and warehouse robotics maker Kiva Systems ($775M, 2012). Even years later, many of these are still fast-growing, significant parts of the company. Kiva’s robots have helped cut operating expenses in fulfillment centers by 20%. While Zappos is still reeling from experiments with its org structure, it played a crucial role in building Amazon’s retail business and its creation of private label clothing brands. Of course, some of these acquisitions were initially met with skepticism. But despite much of the tech industry being skeptical when Amazon bought Twitch back in 2014, analyst Gene Munster now expects the subsidiary to be worth $20B and generating $1B in revenue by 2020. While it’s too early to assess the success or failure of the Whole Foods acquisition, some skeptics wonder whether Amazon’s choice to lower Whole Foods’ prices will deter shoppers who associate low costs with low quality. But even so, the company is likely to see a net gain in shoppers, especially with offers like 5% cash back to Prime members and cardholders. 16 17 While Amazon’s biggest-ticket M&A deals helped it establish itself in new markets and technologies, the recent theme has undoubtedly been about fortifying its AWS offerings. A number of Amazon’s recent acquisitions appear to reinforce its blossoming cloud services business: Irish company GameSparks (July 2017) provided a back-end development platform for game developers, Italian startup NICE (February 2016) made software for technical computing, Graphiq (July 2017) created data-visu- alization tools for databases, and Cloud9 IDE (July 2016) made a collaborative development platform for software developers. All of these help AWS cater to developers and become the go-to place for deploying code. ACQUISITION TRENDS Amazon’s M&A spree in 2017 indicates a strategic desire to bolster AWS, as well as the company’s newer desire to expand overseas. Expansion into Asia & the Middle East This geographic expansion effort is exemplified by the recent acquisition of Dubai-based Souq.com, mentioned above. The purchase will allow Amazon to expand its e-commerce footprint into Egypt, Saudi Arabia, and the UAE, and comes at a time when Amazon’s overseas efforts, particularly in Asia, are beset by intense competition. Amazon faces a number of well-funded competitors in the region, including Flipkart in India (which was launched by two former Amazon employees in 2007) and Alibaba in China. Notably, Alibaba has moved into foreign markets through recent acquisitions, including its April 2016 purchase of Singapore- based Lazada, which provides e-commerce services throughout Southeast Asia. Some of Amazon’s competitors seem to be banding together as well: in 2017 Flipkart raised approximately $4B from Softbank, Tencent, eBay, and Microsoft, which all compete with Amazon in various ways. Bolstering AWS The vast majority of Amazon’s 2017 deals fall under the purview of AWS. Cybersecurity startup Harvest.ai was likely bought to strengthen cloud offerings, while Goo Technologies, a platform that improves 18 online rendering for graphically sophisticated games, may attract game developers to AWS. Meanwhile Body Labs, which provides 3D body scanning and mapping software, may be used by AR/VR developers as well as by Amazon’s internal Echo Look team for virtual dressing rooms. Traditional digital video also makes up a lot of the data stored on AWS, and has been a focus for content creation toolmaker Thinkbox Software, which will build on video editing assets like Biba Systems. And it’s been speculated that Amazon’s acquisition of enterprise meeting productivity tool Do.com (March 2017) will roll-up into AWS’ new Chime initiative, which is a video conferencing suite for business. Another notable acquisition in 2017 was Amazon’s purchase of battery-powered home monitoring system, Blink. At first glance, it may appear to be just another smart home device designed for Alexa integration, but a deeper look reveals the deal could be much more than that. While the device could certainly add value to Amazon’s new in-home delivery program, Amazon Key, Blink’s underlying hardware will likely find its way into all future Amazon devices. Prior to developing its smart camera, Blink developed energy-efficient chips. After the company found the pure-play chip market too competitive, it leveraged its technology to create an energy-efficient, battery-powered, connected consumer device. These chips are the foundation of Blink’s business and are, arguably, the main value-add to Amazon. Blink was still in its infancy at the time of the acquisition, having raised a single seed round for $5.8M in 2015. 19 Focus on early-stage, US Since 2010, Amazon has favored buying early, acquiring 10 Series A-stage companies, followed by 8 seed/angel-stage companies. Notably, Amazon’s Souq acquisition bucked the company’s geographic norm. Despite its desire to expand overseas, almost all of Amazon’s acquisitions have been US-based companies. 20 Morever, the majority of Amazon’s revenue is generated in the US, though its “rest of world” revenue has steadily grown, rising more rapidly than US revenue in recent years. In summary, Amazon mainly acquires companies that align with its Prime, AWS, and Marketplace pillars. There are some blockbuster deals to “dreamy businesses” that have scaled up well, but more often Amazon uses small, practical purchases to develop. After all, this is the same company whose CEO drove a Honda and proudly made new employees fashion desks out of doors as “a symbol of frugality and a way of thinking.” 21 Investments When it comes to corporate venture, Amazon is beginning to get more active. As a fledgling internet company in the late 1990s, Amazon lost hundreds of millions investing in now-infamous dot-com startup failures such as Drugstore.com, Pets.com, and Kozmo.com, among a host of others (the company reportedly lost $60M on Kozmo alone). Narrowly evading death itself in the bust, the company would be licking its wounds for years and was decidedly inactive in investment until the mid-2000s. In recent years, Amazon’s investment focus has shifted to more forward-looking ventures across industries spanning healthcare, voice, IoT, and communications platforms. The majority of these investments are thematically linked to the AWS ecosystem, which now encompasses voice, AI, development tools, and cloud computing, among others. In June 2015, Amazon committed $100M to found its first standalone corporate venture capital (CVC) unit, the Alexa Fund. The fund, which specifically invests in voice and IoT technology to bolster its Alexa Voice ecosystem, is relatively small (Google Ventures, for reference, started with a $100M per year investment goal that’s since grown to $300M+) and lags far behind other tech CVCs like Google Ventures and Microsoft Ventures. However, the fund is also growing. Amazon committed an additional $100M to the Alexa Fund in November 2017, in addition to starting its accelerator program, Alexa Accelerator, in July 2017. Moreover, the Amazon Catalyst program has operated for a number of years, providing dozens of grants to university students attempting to find technological solutions to world problems — from genetically engineered pollution-reducing plants to low-cost water desalination. 3 22 Here’s a look at Amazon’s investing frequency for both Amazon proper and the Alexa Fund & Accelerator (Amazon Catalyst not included): Last year, Amazon’s investment activity was bolstered by its Alexa Accelerator program. Amazon corporate made 3 investments directly, while the Alexa Fund & Accelerator made 15. Of these 15 investments, 10 were completed as part of the accelerator program in July 2017, while 5 were made independently of the accelerator program. Amazon’s corporate deal activity remains on par with its numbers over the last decade, when the company was expanding its modest e-commerce business. 23 Compared to its tech competitors’ investments, Amazon falls in the middle. Google is far and away the biggest deal-maker, whereas Facebook and Apple hardly invest, opting instead to purchase companies outright or not invest at all. With the Alexa Fund & Accelerator propelling Amazon’s investment effort, the company is showing a renewed interest in investing, with its activity reaching its highest levels ever. ALEXA FUND & ACCELERATOR As Amazon makes its big foray into the AI world with its Alexa platform product, its corporate venture fund serves as a bellwether for its efforts to build the go-to platform for voice tech. The fund has existed for nearly 3 years, and to date (2/26/18) has completed 40 deals, 7 of which were announced at the fund’s inception. These include investments from both the primary Amazon Alexa Fund and the Alexa Accelerator started in 2017. The Alexa Fund mostly invests in early-stage companies (seed & Series A), though it has participated in Series B rounds to consumer IoT heavyweights Ecobee (home automation) and Owlet Baby Care (baby monitors). 24 While later-stage investments are rare for the Alexa Fund, the CVC group backed connected doorbell maker Ring as part of a Series C and smart toy maker Sphero as part of a Series G. (Toys actually had a significant impact on Amazon Corporate’s bottom line in 2017, estimated to earn $4.5B in revenue throughout the year.) Notably, these startups all play into the voice category, the primary use case for Alexa, or into new human-computer interaction models. Here’s a quarterly breakdown of the fund’s investment history: The Alexa Fund has historically done just a deal or two per month, which, as previously mentioned, is well below the activity level of Google Ventures. However, the fund completed a record high number of deals in 2017. The Alexa Accelerator, Amazon’s new IoT accelerator operated by TechStars, was responsible for 10 of the 15 deals. After a successful inaugural class in July 2017, Amazon recently announced a second Alexa Accelerator program, launching summer 2018. Nearly all Alexa Fund & Accelerator investments so far have a potential integration into Alexa’s smart home voice controls. These include Rachio (connected sprinkler system), TrackR (small items finder and Tile competitor), June (smart oven), 25 Nucleus (connected intercom system), Mojio (connected car device), Novel Effect (read along sound effects), Petnet (smart pet feeder), Musaic (connected speakers), and Scout Security (security camera). Investments here likely offers more strategic and synergistic value in bringing these products closer into the Alexa ecosystem than a chance at serious returns. Other notable bets have included Thalmic Labs, whose gesture-tracking arm band could add a new mode to control the Echo, and DefinedCrowd, which supplies crowdsourced natural language processing (NLP) training data for 90% of world languages. (Presently, Alexa Voice Service only works in English.) A more forward-looking move might be detectable in Alexa’s 2015 investment into Invoxia, which makes portable GPS trackers. More recently, the fund backed Mojio, a developer of connected car devices for tracking and vehicle diagnostics, and Tinitell, which provides wearable mobile phones and GPS trackers for kids. These investments signal Amazon’s interest in expanding Alexa integration beyond the home. In a deviation from the its other investments, the Alexa Fund also backed mobile phone developer Essential Products as part of a $300M Series B in June 2017. Despite failed attempts to build a mobile phone within Amazon (Fire Phone), the company continues to show interest in the mobile hardware market, if in less direct ways. The Alexa Fund has also invested in artificial intelligence com- panies Comet and Semantica Labs. While Semantica Labs uses machine learning to predict possible user responses — ideal for Amazon’s Alexa — Comet offers a platform for tracking machine learning projects and experiments, a tool that supplements Alexa as much as it does AWS. 26 Alexa Fund’s typical deal partners include familiar names among the most active IoT investors such as Intel Capital, Foundry Group, and Felicis Ventures. Notably, the Alexa Fund has seen a high proportion of exits in the last few years. The first exit for the fund was realized in December 2015, just 6 months after the Alexa Fund’s initial investment: while The Orange Chef, which made a connected food scale, was sold to food discovery platform Yummly, the exit was no home run as the company was essentially sold for parts. Since then time there have been 4 other exits. Artificial intelli- gence chatbot development platform KITT.AI (acquired by Baidu), home smart alarm system Scout Alarm (IPO), and manufacturing services firm Dragon Innovation (acquired by Avnet) all exited in 2017. Most recently, Luma Home, which develops home Wi-Fi extenders, was acquired by Newell Brands in January 2018 at a valuation of $10M. AMAZON CORPORATE INVESTMENTS Investments coming from Amazon’s corporate entity are relatively infrequent — which perhaps comes as a surprise for a company with a stated strategy to “experiment patiently, accept failures, plant seeds, protect saplings, and double-down when you see customer delight.” As we’ll later explore, however, Amazon is beginning to make more diverse bets. The investments the company has made include bets within logistics, cloud apps, and media, with Amazon’s recent forays 27 into logistics and media foreshadowing areas of new business interest. Since 2015, Amazon’s stock has grown at nearly 5x the rate it did from 2012 – 2015. It may seem counterintuitive that a company with such a meteoric rise in stock price would slow down its corporate venture efforts — but that seems to be exactly what Amazon has done. The company’s already-sparse activity slowed in 2016 and remained limited in 2017. Investment peaked in 2011 with 9 deals. Since then, annual investments have averaged less than half of that peak. Despite this recent slowdown in activity, Amazon is putting capital behind a wider variety of industries. From 2010 – 2013, the company solely did deals to internet companies, whereas between 2014 – 2017, it has also invested in media, healthcare, auto & transport, and mobile. 28 This parallels some of Amazon’s broader new business initiatives: live online business broadcasting startup Cheddar aligns with Amazon’s initiatives in proprietary video content, while on-demand home services marketplace HouseJoy aligns with Amazon’s growing home & office services marketplace. But perhaps the most intriguing new investment area for Amazon is in the healthcare sector. Early in 2017, the company invested in its first biotech startup: GRAIL, which focuses on genomics for cancer diagnosis. The deal marks interesting new territory for Amazon, and because genomic sequencing requires intensive computing power, GRAIL and other genomics applications could align nicely with Amazon’s existing AWS business. 29 Unsurprisingly, gene sequencer Illumina, from which GRAIL spun out, is featured as a customer success story on the AWS website. Notably, Amazon tends to invest mainly where it can make strategic partnerships. For example, Mumbai-based ShoppersStop may help to expand Amazon’s e-commerce reach in India. Twilio and other tech companies have partnerships with AWS, while Amazon’s investment in Cheddar will provide insight into live online streaming. In 2016, Amazon’s investment in Ionic Security also featured a “collaboration” with AWS to create data protection infrastructure for regulated industries. The Charts tab from the CB Insights database shows how Amazon’s corporate team has heavily favored mid-to-late-stage deals over the past 5 years. Most of Amazon corporate’s deals have fallen into the $15M – $25M range, and nearly one-third of deals have been at Series E+. 30 Interestingly, Amazon has frequently co-invested with the same investment syndicate that helped the company launch. As mentioned above, Amazon originally raised from Kleiner Perkins Caufield & Byers (KPCB) and angel Tom Alberg of Madrona Venture Group — so it’s worth noting that both firms and Amazon continue to do deals together today. Other Amazon co-investors include a number of “smart money” venture capital investors — in other words, firms with the best combination of portfolio valuations and investment outcomes. In addition to KPCB, other smart money investors investing before, alongside, or after Amazon include Bessemer Venture Partners, New Enterprise Associates, General Catalyst, Accel Partners, Lightspeed Venture Partners, and Andreessen Horowitz. All have invested in at least one company backed by Amazon. 31 Patents Next-generation computing and logistics are two of Amazon’s top R&D priorities. Nearly 40 of Amazon’s 2017 patents are focused on developing its cloud computing systems, while the company also filed over 30 patents focused on improving its logistics network. This logistics focus comes not long after Amazon announced plans to launch its own delivery service (Seller Flex), directly targeting the growing number of third-party sellers on Amazon. This service will allow Amazon to cut costs and reduce reliance on carriers like UPS and FedEx. Early on, Amazon’s zealous use of intellectual property sparked some controversy. One of the company’s early patents, “Method and System for Placing a Purchase Order Via a Communication Network,” perhaps better known by its trademarked name 1-Click, was granted in 1999. The patent is still used today in Amazon’s online store, which, as the name implies, allows orders to be completed in one click based on user data saved from previous orders. Notably, the 1-Click patent expired in 2017, and a number of e-commerce players, including Google, are already working on one-click browsers. 4 32 The 1-Click patent ended up being a central issue in Amazon’s early life, and according to Brad Stone’s book “The Everything Store,” Amazon was aggressive in protecting IP from competitors: “Critics charged that the idea behind 1-Click was rudimentary and that its approval by the U.S. patent office was a symptom of lazy bureaucracy and a broken patent process. Bezos didn’t alto- gether disagree — intellectually he was an advocate for patent reform — but he was determined to exploit the status quo for any possible advantage. He sued Barnes & Noble for infringing on the patent in late 1999 and won a preliminary ruling that forced the bookseller to add an extra step to its checkout process. Amazon licensed the patent to Apple in 2000 for an undis- closed sum and tried to use it, ineffectively, to gain some leverage over a rising and worrisome rival that first showed up on Amazon’s radar in mid-1998: eBay.” Since the dot-com era, Amazon’s patents have shifted and tracked Amazon’s new business priorities. In recent years, Amazon has built a trove of patents, which we explore below in greater depth. Note: This analysis comes with a few caveats, primarily that the patent filing process involves a significant time lag before the publishing of patent applications. This delay can range from several months to years. We also focused on Amazon proper for the purposes of this analysis, which would exclude patents absorbed through external acquisitions. In recent years, Amazon has put more resources toward intellectual property efforts. From a modest 582 patents filed in 33 2010, the company filed over 1500 patents just a few years later in 2014. As with investment activity, Amazon is at roughly half as many applications in comparison to Google’s patent efforts. To dig deeper into Amazon’s strategy focus, we mined each year’s applications and teased out recurring keywords from the patent abstracts, using a significance weighting scheme to surface words and phrases. The key phrases data illustrates Amazon’s diverse business pri- orities, albeit with some time lag. In the early 2010s, applications frequently used keywords like “electronic tablet” and “content item,” which ostensibly would help dig a moat around Amazon’s Kindle efforts. Similarly, Amazon’s AWS business, which took off in the mid-2000s, offers virtualization services through Elastic Cloud Compute, or EC2. Evidently, securing IP around virtual machines is still a high priority: related phrases like “machine instance” were top patent keywords throughout the years, and “virtual machine” has been a top phrase for 5 consecutive years. 34 While patents are still being released weekly, the ones that have rolled in from 2016 and 2017 indicate new interest in drones and cybersecurity, given the sudden prominence of keywords like “aerial vehicles” and “digital fingerprint”. Aerial drones are a large part of Amazon’s strategy to expand its Prime Air logistics network, which Bezos announced in 2013. In March 2017, the company began making demo flights delivering sunscreen. With logistics and UAVs front-and-center in its patent portfolio, we isolated patents containing logistics-related keywords. 2017 (a year that will likely see even more patents surfacing) already has a record 32 logistics-related patents to date. 35 Amazon’s patent portfolio also feature some forward-looking patents that give a peek into the futuristic logistics network the company may one day engineer. In 2016, an application for a patent came to light that suggests Amazon is trying to create a flying warehouse that would dispatch package-laden drones to the ground. Called an “Airborne Fulfillment Center” (AFC), the patent describes the vehicle as “an airship that remains at high altitude.” 36 In the following year (2017), Amazon was awarded a patent for an augmented reality interface that may be used by fulfillment center employees to locate goods more efficiently. And in a more recent patent from 2018, Amazon entertains the idea of drones providing energy, whether electric batteries or traditional fuel, to autonomous vehicles while in motion. All of these above Amazon patents were surfaced using our patent search engine. 37 The ‘river delta’: Where Amazon’s many businesses meet Amazon operates in a wide range of businesses, but at the heart of the company is online shopping and a focus on leveraging technology to offer the fastest, most convenient way to buy things. The best way to think about Amazon is as an amalgamation of many businesses with solid tech at its core. Ben Thompson on Stratechery wrote, “A more nuanced approach considers the fact that Amazon is not a monolithic operation, but rather a collection of businesses sharing resources, including a channel (Amazon.com), logistics, and a common technological foundation.” Amazon might have its hand in every business imaginable, but underlying it all is the company’s technological prowess. While revenue has grown massively, Amazon has hardly turned a profit because it continually reinvests its cash into new businesses, from building new warehouses to beefing up AWS data centers. The philosophy and motivation behind Amazon’s bold reinvestment strategy is highlighted by CEO Jeff Bezos: “I very frequently get the question: What’s going to change in the next 10 years? And that is a very interesting question; it’s a very common one. I almost never get the question: What’s not going to change in the next 10 years? And I submit to you 5 38 that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon, I just wish the prices were a little higher;’ ‘I love Amazon, I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.” Always thinking about how to build tomorrow today, Amazon is investing in and improving its core business by developing new ones. In nearly all its main categories, Amazon’s position as a platform works in a data feedback loop. Amazon owns perhaps the richest dataset on how consumers consume, how sellers sell, and how developers develop. This, in turn, allows Amazon to optimize its online shopping experience, logistics network, developer environment, and even its voice AI, 39 which in turn make Amazon’s offerings even richer. In short, many of Amazon’s businesses follow the classic network effect flywheel. And, as we’ll explore below, some of Amazon’s network effects are starting to collide. One theme that emerges in Amazon’s initiatives is the concept of diffusing internal tools as products. The company began as the sole seller on Amazon.com, and eventually opened up its e-commerce platform (and logistics network) for 3rd parties to sell on. It opened up the computing infrastructure it spun up in-house and sold its computing and storage tools through the now-dominant AWS. Now, Amazon is in a position to do the same in cutting-edge areas like machine learning, workerless retail tech, drone delivery, and voice computing. As these startup-dominated industries gain traction, Amazon may position itself as the necessary middleman for companies looking to succeed through online commerce — benefiting from companies willing to pay the “Amazon tax” that allows them to stay competitive. CORE BUSINESS IN COMMERCE & RETAIL Borrowing from Walmart’s “Everyday Low Price” playbook that was popularized in 1990s retail, Amazon delivered value through competitive pricing. After considering a list of 20 different items, Bezos originally settled on bookselling because of the markup on books and because no physical store could hold all book titles. 40 Not having physical stores allowed Amazon to maintain a selection of over 1.1 million book titles, as well as to develop new customer-friendly (and now-standard) e-commerce features like a personalized web page and book recommendation algorithms. By 1998, the company would offer music and DVDs. And today, everything from cars to uranium ore can be bought online through Amazon. Amazon’s dominance is still often linked to its pricing strategy. From the beginning, the lower cost structure of having no stores allowed savings to be passed on to customers. Early on, Amazon would use a web crawler to find competitor prices and undercut them. As Bezos famously sketched out on a napkin, Amazon’s lasting value is derived from the virtuous cycle that it creates. For most of the past decade, any company that competed with Amazon was either acquired (Zappos, Diapers.com) or simply steam-rolled. On the whole, Amazon seemed relatively unaffected by the rise (and subsequent demise, in some cases) of on-demand startups bringing goods via apps, although it did start its own version of these with Prime Now. 41 As retailers are shuttering stores, Amazon’s e-commerce business is still growing. In 2017, Amazon accounted for approximately 44% of all e-commerce spending in America. In 2000, Amazon gave outside companies the ability to sell on Amazon.com, and this program now accounts for over 50% of the goods it ships. Behind the scenes, Amazon’s retail marketplace is something like a massive slowed-down stock exchange, where its more than 2 million registered merchants leverage algorithms to undercut competitors. Prices even for commodity goods spike and fall like those in a volatile exchange. Increasingly, manufacturers are also going through Amazon and its Marketplace division to reach consumers, and Marketplace continues to be the company’s largest source of revenue after retail. Not coincidentally, in April 2017 the company had more than 1,200 open jobs listed for its seller services division alone. In February of 2018, that number has dwindled to less than 400 — though this is possibly attributable to a growing pool of quality candidates or improved retention rates. Where Amazon can compete, it will often develop its own products as a competing supplier. About a two years ago Amazon began selling over a dozen private-label goods for households. In addition to home essentials sold under its AmazonBasics brand, the company now has private labels in apparel, CPG, luggage, and 42 diapers, among dozens of other categories. Today, the number of AmazonBasic goods exceed 1,000. The strategy behind private-label goods is that Amazon can take advantage of higher profit margins: the company doesn’t need to spend much on marketing and brand development, and with its e-commerce data it already knows which products will resonate with customers. However, Amazon’s leverage as the seller and the platform owner makes for an awkward relationship. Amazon has the power to put its products higher in search rankings, in which case resentful suppliers may want to take their business elsewhere — or, if they can’t afford to lose the distribution channel, be forced to compete with the store brand. Amazon Prime — the membership program created to gratify more time-sensitive and less price-conscious customers — is probably best known for offering two-day shipping with an annual member- ship fee. But Prime has expanded far beyond free shipping, and now includes Prime Video media streaming, music streaming, unlimited photo storage, discounts from Whole Foods, free restaurant delivery, free eBooks, free audiobooks, and a number of other exclusive services to keep its subscription rates high. 43 Breaking into brick-and-mortar After decades thriving as a storeless internet company, Amazon is making its first forays into brick-and-mortar retail on several fronts: Amazon Go, AmazonFresh, AmazonBooks, and even Whole Foods. Amazon Go is arguably the company’s most ambitious brick & mortar initiative to date. The stores will employ RFID tech and computer vision to allow any Amazon Prime member to shop without a checkout process or in-store employees. Amazon ran into issues with the technology in early trials, but seems to have successfully worked past such obstacles, opening its first Amazon Go store in Seattle in January 2018. The company reportedly has plans to open 6 additional Amazon Go locations in the US throughout 2018. A patent recently granted to the company outlines a wristband that could monitor the performance and efficiency of employees. Needless to say, many shamed the idea of tagging and tracking employee performance with such oversight. But with the increas- ing adoption of smartwatchs and wristbands by consumers, this technology could prove useful in Amazon Go stores where patrons take items from designated locations throughout the store. 44 In addition to the cashier-less Amazon Go, AmazonFresh Pickup (now with two locations in Seattle) offers car-side grocery pickup. Both the Amazon Go and AmazonFresh Pickup models may soon be adopted by Whole Foods as Amazon continues to grow its share of the massive grocery market. Finally, Amazon is also increasing its brick-and-mortar footprint with physical bookstores, now with 13 locations across the US and 3 more on the way (as of 2/25/18). Moving into brick-and-mortar allows Amazon to expand its reach with an offline presence. Some consumers prefer touching and seeing certain goods in person, especially apparel, which Amazon is now supplying with AmazonBasics and its various private labels. The move to physical retail may seem counterintuitive, as stores, with their limited selection, were once the antithesis of Amazon. But by having a last-mile channel for books, groceries, and big- ticket sales like furniture and appliances, physical stores may help Amazon effectively sell what it wouldn’t otherwise be selling online. Expansion in India India is expected to become the world’s fastest-growing e-commerce market, and Amazon has said it will invest $3B in its India business, with a focus on its grocery store offerings. In just the few years it’s operated in India, Amazon has signed contracts with major delivery services and started its own delivery service to augment these. (It’s rumored that the success of Amazon’s proprietary delivery service in India is basis for its current shipping initiatives here in the US.) Amazon’s investments in India-based companies like in-home ser- vices company HouseJoy, e-commerce platform Shoppers Stop, and insurance marketplace BankBazaar further its involvement in India’s tech ecosystem. 45 However, Amazon faces challenges in the region too, not the least of which is the fact that currently, only 35% of India’s popula

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About Techcelerate Ventures

Tech Investment and Growth Advisory for Series A in the UK, operating in £150k to £5m investment market, working with #SaaS #FinTech #HealthTech #MarketPlaces and #PropTech companies.

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