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Amazon's dilemma

March 14, 2006

In an article I wrote last June for Business Week Online, I modestly proposed that Amazon split itself in two, separating the retailing operation from the technology services operation. I pointed out that the economics of those two businesses are very different, and that trying to run them within one company inevitably leads to management conflicts that can damage one or both businesses.

I admit that it seemed like a pretty radical suggestion eight months ago, but I think Amazon's moves since then have only underscored the fundamental schism that runs through the company. Amazon's launch today of an online storage service called Amazon S3 is only the latest in a series of moves - opening up of its Alexa search engine, launching its Mechanical Turk human-computer interface - that show the company is intent on expanding its tech services business well beyond the rental of its retailing infrastructure. It wants to create the platform of choice for developing consumer web services. As Rob Hof says, S3 "seems to suggest that ultimately, Amazon could offer a wide range of services to do whatever businesses and consumers want to do online."

The question to ask is: What the heck does this have to do with being a glorified catalog retailer? The answer, so far as I can see, is: Not much. If Amazon is serious about expanding its tech business alongside its retail operation, its economic, managerial, and organizational conflicts will only grow more severe. It doesn't take a Solomon to see that this baby should be split in two.


There certainly is a pretty huge branding schism opening up there, and S3 sure does look incredibly awkward stuck inside retailing shell of Amazon's interface. But those are ultimately surface issues, and I think there actually is a missing connector between the two sides, in that a good chunk of Amazon's tech centric offerings appear to be the results of research done to improve their retail operation.

The Mechanical Turk for instance, came from Amazon's realization that it needed a human element mixed in with it's algorithm for scanning in "search inside the book" pages. S3 I would guess stems in large part from their development of systems to sell digital files, note that the cap size of 5GB is suspiciously around the size of a Hollywood movie. Similarly A9 seems to have drawn a lot on the algorithms originally designed for searching the masses of retail and book data. Only the Alexa API really stands out as pure tech side innovation, perhaps because Alexa's relation to the rest of Amazon has never been that clear.

That leaves Amazon not with a challenge of how to balance two different business models inside the company, but how to do so in a way that the tech side continues to help the retail side stay innovative. Of course the retail side might just be so monolithic that innovation is no longer much of an option...

Posted by: Abe Burmeister at March 14, 2006 07:39 PM

I think you are right Nick - but this opens up the "Pandora's box" for Amazon that seems ot happen to all large organisations:

1. We are getting too big and too diverse - lets split up the company.

2. Management changes - we need to be a more diversified organisation, so need to re-aquire those areas we divested to have a broader revenue base.

3. Management changes again - see point 1.

it becomes a real roller coaster. And along the way, the true innovators in the organisation become dis-enchanted, leave and start their own small companies - which (in time) become the next Amazons!


Posted by: Simon at March 14, 2006 11:27 PM

Dunno - a low margin business piled on another low margin business ? Where's the cash cow??

Posted by: Gianni at March 15, 2006 07:15 AM

Don't see where the problem is... Just because S3 is sold through their retail website does not mean that one monolithic group is managing everything... What we see in the website is just the surface.. the organisation that runs it can be quite different..

@Gianni - i think amazon is trying to utilize space that is lying unused, n/w bandwidth that is unused etc... max utilisation and some money to make for what they are already paying... makes sense right?

Posted by: Sabarish Sasidharan at March 27, 2006 12:23 AM

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