Since its launch more than a decade ago, Amazon.com has served as an interface between the digital and the physical worlds, providing an easy and efficient way to shop online for an ever expanding array of material goods. As the first widely successful Internet retailer, its business has been as much about the old-fashioned craft of logistics – warehousing, picking, shipping – as the newfangled arts of web design, online merchandising, and algorithm wrangling.
But the company’s recent moves show that a transformation, or at least a refocusing, may be in the works. Amazon may be signaling that it sees its future more as a river of bits than as a river of goods. Over the last year, the company has greatly expanded its “digital downloads” business, launching its Unbox digital movie service and its mp3 music store and unveiling its Kindle ebook reader. At the end of January, it announced it would buy Audible, the largest seller of downloadable audiobooks and other digital spoken-word products. Most audacious of all, Amazon has begun selling computer processing and data storage in purely digital form through its Amazon Web Services unit. Whether it’s books or music, movies or servers, the company is aggressively trying to substitute virtual goods for physical ones.
Amazon isn’t about to close down its physical warehouses, of course. But its digital warehouses could eventually become the center of its business. That may be good news from a financial perspective. Amazon has invested a great deal of money and ingenuity into fine-tuning its physical logistics operation, and that operation has given it an edge in online retailing, but the cost of storing, handling, and shipping physical goods has always been a drag on its profitability. That cost largely disappears when customers buy products as bits rather than atoms.
There are risks, too. Many of these digital markets, particularly ebooks, are small, and their prospects are uncertain. And as Amazon moves more into the digital media business, it will have to fight tough rivals like Apple as well as an implacable new foe: free stuff. Amazon will have to succeed in holding the line on prices or else figure out how to earn revenues through complementary services and products or other indirect means.
If the company meets those challenges, what might it look like in the long run? It may end up looking more like Amazon Web Services than like the Amazon.com we’re used to. Just as AWS currently supplies virtual servers and storage drives to companies, Amazon could become the preferred supplier of virtual media servers to individuals. You store all your media on your own virtual machine in Amazon’s data centers, and Amazon serves up your audio and video seamlessly to whatever device you happen to be using at any given moment. Everything’s automatically synced, cached, and backed up, without you having to worry about it, and you use one web interface to control it all.
I’ve long thought that the AWS business and the retailing business were fated to come into conflict. But maybe they’re the same business after all.