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From the Concept Library, concepts for this article are:

• Economies of Scale: Purchasing Economies
• Economies of Scale: Fixed Costs
• Linked Businesses

From the Company Library, companies for this article are:

• Amazon
• Alibaba
• Pinduoduo

——-Transcription Below

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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And today the topic is what Amazon should copy from Alibaba and Pinduoduo. So this sort of stays under the general framework of what are these strategies of the best digital companies coming out of China and the West. And in this case, we’ll talk about three of them, but mostly about Amazon and what I really think. they could learn from these other two successful companies, Alibaba, Pinduoduo. And if I had, you know. two minutes to pitch something to the Amazon management. This is what I’d say they should pay attention to strategic strategy wise. So that’ll be kind of the topic for today. A lot of cool stuff going on with all three of these companies actually. Now for those of you who are subscribers, I’m going to send you a pretty decent sized article, maybe a couple of them about this topic and sort of how e-commerce is evolving differently in the different strategies between big one. I think there’s a lot of good lessons in there for sort of digital strategies. So that’s on the way. For those of you who aren’t subscribers, you can go over to jefftausen.com, sign up there, free 30-day trial, join in, see what you think as we sort of go through the strategies of the best digital companies of China and the West. And let’s see other things standard disclaimer nothing in this podcast or in my writing on the website is investment advice the numbers and information for me and any guests may be incorrect the views and opinions may no longer be relevant or accurate investing is risky this is not investment advice do your own research. And I think that’s it oh one other thing my books, I have two motes and marathons books that are out the third one should be going up in hopefully two weeks. So part three will be up all about sort of how you build modes and how you do sort of competitive marathons as digital business. Okay with that let’s get into the topic. As always there’s a couple sort of key concepts for today and these are I think what matters most when you’re looking at Amazon, which are purchasing economies and fixed costs economies of scale. And I’ll give you a bit of a summary of Amazon. It’s a pretty straightforward business. I do actually follow it and have for many years. I haven’t really talked about it on this podcast before. Mainly because stuff doesn’t change very often. It’s pretty much the same strategy as a couple years ago. I mean, you can spend a lot of time digging into the various subtleties of their logistics spending and their supply chain and all of that stuff, which is what people do. But the business model doesn’t change that much. But within that business model, probably the two biggest concepts, you know, the two biggest engines that are driving this enterprise are purchasing economies and then economies of scale based on fixed costs. And you can go to the concept library and I’ve talked about these before that is actually very similar to JD in China They would pretty if you ever meet with like it was the CFO I was meeting with once he basically said the same thing when we talked about the financials of JD These two ideas immediately came up which is you know purchasing economies Which is if you’re gonna act like a retailer as opposed to a platform business model Alibaba is a pure platform They don’t buy and sell their own goods have inventory, they don’t have costs of goods sold as a major number. You know, they’re taking a fee in terms of interactions. Well JD is differently. JD has always been a retailer first and a marketplace second. So you know, their CFO would obviously talk about, hey we’re bigger than everyone else so we can buy our goods cheaper than others. Hence we have purchasing economies or you know, they often call them economies of scale based on purchasing. It’s a bit of a I mean, this is one of these advantages you have that is relative to other competitors. This is not a competitive advantage, which it is that everyone can have certain competitive advantages like switching costs. Everyone can have those. You can lock in whatever customers you have in various mechanisms. Purchasing economies, economies of scale are an advantage based on being larger than your competitor. So only one or two companies generally gets this. Well, in e-commerce in China, that’s JD. They buy a tremendous amount of stuff. They get good costs from the suppliers of all their SKUs, and then they pass those cost savings on as lower prices to their consumers for the most part. That’s pretty much the same strategy Walmart uses and Carafour. They’re all like massive retailers that spend a lot of their time trying to squeeze their suppliers every which way can purchasing economies and then pass that on to their customers usually and you know the net net of all of that is they have the largest product selection and the lowest prices which is a very good way to be in the minds of consumers for a lot of products that’s a really good retail strategy. We have everything you need and we’re cheap or as cheap as anywhere else. So there’s no reason to go anywhere else, which is pretty much why people go to Walmart. Okay. So that’s number one. Now purchasing economies, which I’ll talk about. This actually becomes a really cool question within Amazon as opposed to say JD. Because where does JD buy all its stuff? Well, it mostly buys everything in China. Where does Amazon buy most of its stuff? It mostly buys a large percentage in China. So a company like JD spends a lot of time thinking about last mile delivery, the last mile which tends to be expensive in China and in the US. But Amazon spends a lot of time thinking about first mile. For them, first mile is from a factory in Asia which often takes two weeks plus now it takes three weeks right now. Get it through Los Angeles port and then get it into a warehouse in the US ready for shipping. OK, that’s first mile. They have a major first mile problem. A lot of these companies in Asia, we don’t really talk about First Mile very much, only for furniture and some other sort of specific types of merchandise. It’s a big deal for a company like for Amazon. So you hear about Amazon talk about First Mile all the time and that’s part of their purchasing costs. Because when you look at purchasing economies for a company like JD, you’re mostly talking about cost of goods sold. We bought the book for $5, we sold it for seven, and you’re looking at payment costs, usually 3%, 4%, you know, whatever the payment mechanism. Those are typically the variable costs that they try to squeeze down by their superior scale, right? When you switch to Amazon, a lot of what you hear about is definitely cost of goods. as a major variable cost, but you also hear about shipping costs. which can be delivery because they mostly, traditionally have done that outside of their own company. You know, you go back to 2018, 2019, only about 40% of delivery was done by Amazon itself. The rest was contracted. So they would, you know, use their purchasing economies to try and negotiate those down as much as possible. FedEx, a lot of UPS. Well, they’ve brought most of that in-house in the last two years. Now it’s about 72, 75% of all deliveries and that’s going after that major cost. So that sort of variable costs are your cost of goods sold, your payment processing, but also the shipping delivery costs are a big deal from Amazon. So it’s the same idea for both of these types of companies, but it’s pretty different when you dig into the details as a US based e-commerce company versus say a China Asia one. Okay. Fixed cost economy of scale talked about that a lot. If you look at Amazon’s numbers and you read their discussion, they’re going to always break in their cost structure into two buckets, variable costs and fixed costs. And they’re trying to drive those down. Variable costs I just talked about. The fixed costs they’re mostly talking about are IT and logistics. And by logistics, I mean their warehouses, not including their delivery, which typically for them goes under their delivery costs. That’s variable. So, okay, those are kind of the two big buckets. And JD would say pretty much the same thing. The closest company we have to Amazon in Asia is probably JD. You could also point to Coupang in South Korea. I’m not counting Japan, which is a whole different universe. Okay, so those are the kind of the two ideas I wanted to talk about. Now let’s sort of go into some of the basics of Amazon. For those of you who are familiar, this is gonna be a little bit boring. For those of you who aren’t, I’m just gonna give you the basic picture of Amazon in terms of strategy and business model. Now, if you wanna talk about the operations, that’s a whole world of thinking. I mean, there’s tons and tons of details that people spend years of their life as equity analysts in tech in the US and the West, studying about China’s supply chain. about Amazon supply chain and I’m just going to talk about the business model overall strategy. You know the first thing that jumps out at you is Amazon is very much a creature of the developed western economies, industries in retail and logistics. I mean this was a company that was created when DHL, FedEx and all of them already existed. This was when retail already had Walmart very different than let’s say an Alibaba or JD, which was developed in a very primitive retail market for China. I mean, there was some stuff like big box stores in the Eastern part of the country, but for the most part, no, retail was very underdeveloped in China and distribution was primitive. Distribution has existed in China for 50 years. It’s always been there, but it was always sort of state run. And you had these multiple levels at the city and the province of distributor on top of distributors. Incredibly inefficient. So there wasn’t a FedEx or UPS these Chinese companies could just tap into like Amazon could. Okay, so Amazon sort of was really developed against serious retail players like Walmart, as well as serious logistics players like FedEx. You know, massive company now, 1.6 million employees, full-time and part-time included. Very, I mean, when you look at this company, what jumps out at you is this is a retail company, world-class, and it is a logistics company, world-class. really almost three companies stuck together. A web services company, AWS, a major logistics company, and a great retail company, all kind of stuck together. Okay, so you go through their numbers and you go through their strategy. And the first thing that jumps out at me is this is the most uninspiring, poorly described… strategy business model I’ve seen in a long time. I mean it is not good. Try and read their 10k and it is just terrible. It’s like I mean It’s like something written by a hedge fund manager. Like it is very detailed and thoughtful about the finances. You know, there’s very clear thinking of, this is like a direct quote, you know, the focus is long-term sustainable free cash flows. That’s, you know, literally number two in their description of what we are as a company. And then it breaks that down actually in a fairly good detail. You know, we are going to increase operating income. we are going to more efficiently manage our working capital, which includes counts receivables, counts payable, inventory, some capex. Then the net net of all of this is we will increase our sales, we will decrease our operating costs after any sort of ongoing capex to improve the user experience. That’s pretty much how they talk about their business. It sounds like a hedge fund. as opposed to something you would hear from Alibaba or JD or Pinduoduo where they are going to talk overwhelmingly about digitizing an industry and being sort of bold and visionary. in terms of the user experience and they’ll talk equally about consumers and merchants and brands and often a company like Pinduoduo will talk about digitizing and you know dramatically improving the experience of small farmers who produce goods and sell them directly to market. So you know this when you read Amazon what doesn’t jump out at you is any sort of vision or purpose and that’s not actually I’m not just being glib about that. I think that’s actually kind of important aspect of building digital companies. That you know, you really do want to speak to purpose. You get better results, basically. You get far more motivated employees, great tech people don’t think like hedge fund people. They think like people who want to change the world. And you get that at most good tech companies. You don’t get any of that from Amazon. It’s really not terribly inspiring. I mean, I’ll give you like how they describe themselves. We want to be, and this is a quote, Earth’s most customer-centric company, unquote. And you know. Our four principles for this are customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, long-term thinking. And then you think, well, who are your customers? Well, they define them for you. Who are their customers? Consumers, sellers, developers, enterprises, content creators, advertisers, and employees. It’s pretty much everyone. I mean, it’s… What they’re really talking about is three to four different businesses that have, in some cases, platform business models, in some cases, linear traditional businesses, which is retail for them, and media to a large degree. And against those two to three businesses, they have multiple user groups. And that’s what they consider their customers. And they’re going to be customer-centric for all seven groups. I mean it’s not gibberish, but it’s pretty close to that. It’s very poorly laid out in my opinion, which they do not care about at all, by the way. So let me give you my description of, you know, what they’re doing. I would describe this as… four linked businesses. And if you look on my six levels, I talk about linked businesses at the very top, which is anytime you have multiple businesses that link to each other and make each business stronger. Now a digital version of that I often talk about is complementary platforms, where multiple platform business models all support each other. Okay, that’s one type, that’s Alibaba. That’s literally what they do. And that’s what C-Limited is trying to do. Okay, Amazon is not really trying to do that. They are linked businesses, but most of their businesses are not platforms. They have some platform aspects, but if we sort of go through their four businesses, at least two of them are not really platform business models. So I would describe this more as linked businesses, which is good. That can be a very good thing. So number one, a great retail business that is pretty much an online version of Walmart. and it’s closest to JD, where this is a traditional retailer that also has a marketplace stuck on it. So it’s a product platform sort of combination. They have a media company that produces and distributes and contracts their own media. Pretty much a linear business model. They you know they do contract into live shows, they develop some in-house, but they certainly aren’t a platform like YouTube or something like that. Number three, a large logistics business. which is similar to JD Logistics in that sense. It could become a fairly vibrant platform in the future. I would say that’s not mostly what it is today. And then AWS, which in that case is a digital platform. So they have sort of in my view, like let’s say 1.5, maybe up to two of their four businesses are platform business models. And then the others are just linked businesses and they’re all linked together. The others are more traditional linear businesses. So the one, two, three, four businesses, other. They all support each other. That’s very, very good. And each business in its own right is fair, you know, very successful. These are all like top three, top four in each of their four businesses, which is great. So, you know, in that sense, it’s somewhat similar to, let’s say Tencent or Alibaba or any of these other giants. It’s just much less of a purely digital animal like Tencent, I would call this more linked businesses. I’m not going to go through this because I think everyone knows this, but here’s how I would describe the Ford. Okay, the retail is obviously the foundation. It’s the engine. It’s a spectacularly good, overwhelmingly online retailer that is closest to JD. And it is pretty much pursuing the Walmart model, which is our… And they basically, when they describe themselves, here’s their description. They say, we are an online plus physical retailer. This is not an exact quote. That focuses on selection, low price, and convenience. I mean, they are pulling the three levers in consumers’ minds. that Walmart pulls and pretty similar to JD as well. The big selection, the more products we have, the better we are versus competitors, the better we are for consumers. The lower our prices, again, better versus competitors, better versus consumers, and we try to be very, very convenient with very good ease of use. Now that last term tends to include quite a few things. Definitely when you hear, oh, we are focused on convenience. For a company like Amazon, the big lever they’re pulling under that is fast and usually free delivery. It doesn’t actually have to be free. You know, you can bake those costs into other places, but the perception of free delivery is very powerful in terms of consumer psychology. If you offer people free delivery, even if it’s not really free, yeah, they go for it. convenience, fast and free delivery, ease of use, very good customer service. And then convenience could be look it’s an app, it’s a web page, it’s on Alexa, it’s on Ring, it’s on Kindle. I mean there’s lots of sort of points of access. We could put all of that, I mean that’s their basic strategic position and that’s a very good position to be in generally speaking. That is what most people want for most things in life. Now there are lots of differentiated niches in retail and e-commerce, which is why I like the space so much. You can be fashion, you can have user experience, you can have lots of fun discovery, you can have entertainment-based e-commerce. There’s lots of plays within that, but arguably the biggest bucket in terms of dollars spent is all the stuff you need for life, which is most of that stuff you can get at Walmart, you can get on Amazon. Okay, fine. Now if you’re going to play that game, which is similar to what JD is doing, they basically have the same approach. And you could say Walmart the same and Carrefour. You know, the two levers you’re going to try and pull the hardest strategically. No, I keep saying pull the lever, uh, purchasing economies, right? We got to get cheaper stuff, which means we have to use our scale. And because we’re acting as the retailer, the seller of record, we have to buy the goods, put it in our inventory, sell it, take a gross profit. We got to get our cost of goods sold down. How do we do that? We negotiate the bejesus out of our suppliers. We integrate our supply chains into Asia, into China. we try and pull those and they’re doing all of this, which is pretty much what JD is doing domestically. It just turns out that’s a bit different when you’re not shipping across the Pacific for most of what you’re selling. And then obviously delivery charges is a big one. I’ve already mentioned that. The other one you think about then when you look at their sort of purchasing economies is you look at their content costs. For Amazon Prime, all their videos, most of that is licensed. So those content costs, the costs of physical goods, and then the delivery costs, all of that gets you your big variable cost, which is cost of goods sold, cost of sales, and they keep driving that number down. Okay, fine. I think that’s pretty sort of retail 101. Media company, Amazon Prime, business number two. Obviously you don’t have any of those delivery costs, the supply chain costs go away, but you’re still pretty much talking about purchasing costs. Purchasing economies, which is negotiating with the media houses and the studios to get whatever content you need to show. And then also you’re talking about economies of scale that are fixed costs within content spending, which is sort of the Netflix and the Amazon game. They allocate a certain percentage of their revenue to content development every year, which is in the tens of billions for both of them, which is crazy. And then you distribute those fixed costs over your user base, and you get a lower per unit cost. So Netflix and Amazon Prime are both playing the same game, which is we outspend our competitors on our fixed costs of content development. And additionally, we negotiate like crazy on our purchasing economies. Fine. That game, that’s business number two. Business number three, the logistics one. This is one I think is actually really interesting because when they talk about their logistics business, you know, it looks a lot like JD Logistics, which has now gone public so you can pull those numbers. So a lot of, you know, fixed costs, not just fixed costs in terms of opening up warehouses and staffing them and having all those trucks, but there’s a lot of fixed costs going into IT. developing their sort of advanced tech systems that you know oversee their logistics network and that’s usually how they talk about it it’s a network and there’s a tremendous amount of R&D being spent here which is literally what JD is doing as well where they’re building robots and they’re building drones and that is a fairly impressive fixed cost which would both you know be both your sort of annual spending on this stuff as well as maintenance and growth capex you’d have to factor that into that sort of fixed cost equation You know, that’s a very cool business model. I’m not really sure where that one’s going that’s probably my biggest question for a company like Amazon is If you build out this massive network for logistics and the supply chain that feeds it Are you going to open that up as a platform business model? that anyone can use to ship anything? Are you gonna become FedEx for Amazon? Now JD Logistics has already answered this question. They’ve spun off that business and they are very openly saying, we are gonna be a full service, end to end, integrated logistics fulfillment company that anyone can use. And they talk about, you know, for bulky. deliveries, furniture, things like that, we will give you an end-to-end solution that covers the first mile, because it turns out first mile is very, very important when you do furniture. You know, if you have a furniture factory, you’re not shipping that down to the store, you’re shipping it right down the street from the factory where it sits in a warehouse until someone buys it. You gotta get it out of the factory as soon as possible. So when you talk about sort of a logistic solution end-to-end for furniture, you talk a lot about first mile, being close to the factories. When you talk about a solution for FMCG. Coca-Cola, things like that. You’re talking a lot about actively managing the inventory in 7-Eleven stores and convenience stores and moving it very dynamically there and getting it into people’s homes and restocking the 7-Eleven three times a day. So, you know, when you talk about this end-to-end logistics solution there, and these companies like 7-Eleven, I mean, they’re using JD as clients to do this. You end up talking there. Now, if you talk about cold chain as an end-to-end logistics solution, Very different. If you’re talking about apparel, which has a lot of returns, well that’s a different logistics solution. So when you look at sort of. what Amazon is building in logistics, you can see JD Logistics has already gone down the path of this massive expenditure every year, is not just gonna be part of our own supporting capabilities for our e-commerce business, we’re gonna open this as a service to anyone, and you’re basically gonna become kind of a platform business model, or at least just a general service business to anybody. I’m sort of looking at Amazon to see how far down that path they’re going to go, which I think is kind of the cool strategic question for them. Anyways, last business, Amazon Web Services, AWS. This is just an awesome digital platform business model. For those of you who, you know, I’ve talked, you know, follow this stuff, I put this in one of my five platform business models. I put this as a CCS platform, a collaboration, coordination, and standardization platform. And I put Snowflake under the same category. I’ve talked about this before. If you’re curious, look up my five platform business models. Look at CCS type platforms. You’ll see. cloud companies, IOT ecosystems, snowflake and data intelligence, sort of taken those apart. Now in this situation, this is the one. area I would argue that Amazon is ahead of China significantly. Their cloud business is pretty far ahead than what say Alibaba cloud or Tencent cloud or Huawei cloud because that sector is far more developed in the west than it is in China and most developing economies. Okay so that’s kind of, I think that’s enough for Amazon. I don’t think I need to repeat this too much but I would break you know, sort of concepts that cut across this would be economies of scale for fixed costs and then purchasing economies, whether in cost of goods or content or whatever. Okay, that’s sort of a I think a pretty solid strategic pass on Amazon. And that picture hasn’t really changed much in the last three to four years, in my opinion. Alright, that said, let me just sort of jump to the so what. What do I think Amazon should copy from Alibaba, Pinduoduo, you know, what would be the three things? And I really do have a list of sort of three things. This would be my two minute, you know, here’s what I would do if I was advising them. Number one, I would copy Pinduoduo’s C2M service product. Now, Pinduoduo, very cool company. You know sort of a very late entrant to e-commerce in China. Everyone thought the game was over. It was JD. It was Alibaba. They were the Giants. And then out of nowhere comes Pinduoduo. And they go into fifth tier cities, very rural. And what do the fifth tier cities care about? Cheap, cheap, cheap. Right. That’s that was you know the big thing. So how did you know sort of Pinduoduo do this? Well they did something that was exceptionally clever. They basically went C to M. They connected their consumer. Now everyone, let me put a caveat. When everyone talks about Pinduodua, they start talking about social e-commerce because this was mostly people in the early days. in villages, in fifth tier cities, who didn’t have laptops, they were just using their phone, and what were they using on their phone? They were using WeChat. And on WeChat, they were doing group buying. Like get all your five friends together, your 10 friends together, and let’s all buy tissue paper together and get a discount. So there was a viral aspect, a group buying behavior that basically made it viral, and WeChat gave them permission to do that, because WeChat, Tencent was an investee in Pinduoduo. companies to do this generally speaking. That was kind of the story and people started calling it social e-commerce and I don’t really buy any of that. I think there was a viral component to group buying. We’ve seen that in other places. Fine, clever, very good tactic that you can use to break into an industry and could grow. It’s a growth hack. Fine. The business model that I thought had the power to it was C to M. Let’s instead of doing the Walmart Amazon JD model, which is let’s offer everything at a low price so that people come here for everything. Let’s only offer select items and we will offer a very good deal on those select items. So the analogy you can do is instead of going into a restaurant and getting a hundred page menu with everything you could possibly want to eat, you go into a sushi bar and you sit down and on the sushi bar, there’s a little conveyor belt and things just go by the conveyor belt and you choose if something comes by that you like, you pick it. So it’s a much smaller, uh, list of items that are offered. Instead of offering everything, we’ll offer a select number of things and we will just put them on a conveyor belt, sort of like a TikTok newsfeed that goes by people. Here’s tissue paper today. If you buy today, you get the special price. Here’s milk today. You know, it’s just the conveyor belt that goes along the smartphone screen and you click what you want. Now, why is that so clever? Because This whole, everything I just told you about Amazon and JD was all about… If we’re gonna offer everything to everyone, because that’s our proposition to consumers, that implies a tremendous logistics and supply chain operation, because we have to manage everything. We have to offer everything. We have to have it all ready to go. We’ve got to have our warehouses with hundreds of thousands, really millions of SKUs at all times. It implies a tremendous operational complexity in supply chain and inventory. But if I abandon that consumer proposition, say look, we don’t have everything. We have a small select group of things, but if you log in very frequently during your day, which is what people on Pinduoduo do, we will always have items sort of going past you on the conveyor belt that are very, very cheap and you can pick them. Hey, milk is very, eggs are very cheap right now. And if you invite your friends with your order, you get an even bigger discount. Now, how do they do this? C to M. You don’t offer everything. You bypass all the inventory requirements. You bypass all the distributors. You go right to a select number of manufacturers and you say, we are not as big as Alibaba, but we would like to buy a ton of eggs from you this Friday. Because on Friday, we will put on the conveyor belt a special deal for eggs. And you give us a good price and we will. sell them at this price plus a percentage, that’s how we’ll do it. So by going C to M, by dramatically reducing the number of SKUs, you can do it and you can go direct the manufacturers, you can cut out all the middlemen, you can cut out all the distributors, that saves you a lot of money, you can get purchasing economies because you’re going to place a bulk order from a specific set of manufacturers, so you get a discount there. You dramatically simplify your logistics operations because you’re not carrying all these items anymore. You’re only carrying a certain number And you probably so you get one two three significant cost savings by switching to this different approach You cut out the middleman you get purchasing economies of scale and you get a much similar legit simpler logistics operation to build and you probably get a fourth one, you probably get a fourth benefit in terms of cost, it turns out. that when you offer people this discount on eggs today or tissue, eggs is not a good example because that’s sort of a fresh grocery thing. Forget that one. Let’s say tissue paper, toilet paper, basic household staples that you would wanna buy cheap that aren’t perishable. It turns out people don’t care if they get them the next day. It turns out that free and speedy delivery lever. not that important. So I don’t have these delivery costs that are problematic because I have to get everything there the next day. You can send people stuff five days later and they’re fine with it because it’s just a household stable that they need and they were happy to get a good deal. So you get at least three to four bytes of the apple in terms of reducing your cost structure on this select smaller number of SKUs and that enables you to offer things to people cheap. and they love it, especially like these fifth tier cities. Amazon could do something like that today. They could put up a newsfeed with just here’s our deals of the day. And if you buy any of these, we will negotiate directly with manufacturers, get you a cheap deal. It’s not gonna be quick, but it’s gonna be super fast. And one, consumers love this alternative approach. And two, when you offer these deals, they log in all day long. You get much higher engagement. Now, I think they’re probably doing a certain amount of this because I know they do some C to M, but I don’t see your average sort of TikTok-like newsfeed of special deals where you log in all day long. Now, perhaps the version I have of Amazon, you know. They’re not doing it. Maybe they’re doing it more than they, but I’ve been hunting for some sort of pin duo duo CTM model, you know, this sort of TikTok-ish newsfeed. I still don’t see it. So I’ve been hunting around for a while to see if they’re doing this and I really don’t. So, but it’s possible I’m wrong. But yeah, that would be number one on the list. Copy the CDM plus TikTok model. I think that would be very cool. I think you get a lot more engagement. And this leads me to sort of lesson number two. What is Alibaba and Pinduoduo, what are they better at than Amazon? They are far better at the user experience. That’s kind of the China thing, especially for e-commerce. You know, the Chinese players, whether they’re entertainment focused like TikTok or Tencent or whether they’re more e-commerce focused like Alibaba, Pindua, they are incredibly good at continual innovation on the consumer experience because Chinese consumers are super demanding. They’re very adaptable. They will switch apps like it’s nothing. So you have to, it’s a very brutal environment to survive. You know, Alibaba is incredibly innovative on the consumer side. And what we’re really seeing out of China when it comes to e-commerce, they’ve already figured out the magic equation for how do you engage consumers in a digital world for e-commerce. The magic equation is e-commerce plus entertainment plus social media, all three together. That’s what they’re all sort of moving towards. Alibaba, e-commerce plus entertainment. They’ve merged these things together five years ago. That’s live streaming, that’s Taobao Live, that’s hey, I’m gonna watch my favorite live streamer and buy stuff and chat while we’re doing it all. And it’s fun. We can see Tencent coming from the other angle. There’s social media. They’re trying to add entertainment, which they have a lot of gaming, but they’ve added live streaming and short video under WeChat. And now they’re trying to add e-commerce. So they’re doing mini programs. I mean, they’re going for the same equation, but they’re kind of coming from the other direction. TikTok, same thing. They’ve already got lots of entertainment. They don’t really have the social side. They’ve got entertainment and now they’re trying to add e-commerce. Everyone is consolidating around the same equation. consumer experience where you can’t tell the difference. You’re watching your favorite live streamer, you’re sort of having fun in the chat room on the side or bullet point across the screen, you’re buying stuff as it comes up and that’s what people do. And this is singles day where it’s entertainment and presentations and live streaming and short video and concerts but anything you can see you can buy. It’s all one thing. Now, we don’t see anything like that level of consumer level innovation coming out of Amazon or really out of the US. You know, a year ago when when TikTok was maybe going to be forced to sell itself in the US and Microsoft was the bidder, which was weird. And then Oracle came in, which was weird. The only one that made sense to me was under that maybe deal was Walmart. Walmart was going to be a minor bidder under Microsoft. And everyone thought, oh, that’s weird. And I’m like, that’s the only part of this that makes sense to me. Walmart is awesome at entertainment. This could leapfrog them in front of Amazon. in terms of entertainment plus e-commerce. I’m sorry, I said that wrong. Walmart is awesome at e-commerce. If the future is e-commerce plus entertainment plus maybe social, if they buy into TikTok, they could leapfrog Amazon and integrate e-commerce. That part actually made sense to me. Because Amazon doesn’t integrate its video stuff with e-commerce. It’s kind of boring and not terribly interesting. So I thought that was an idea. There’s always this rumor that Facebook is going to hook up with Shopify. That would be social media plus e-commerce. There’s this idea in Brazil and other places that WhatsApp is gonna partner with Shopify Sort of like WeChat that would be kind of like WeChat plus mini programs That would you can kind of all see where this is going But yeah, generally speaking that would be sort of what should they copy number two? They should copy Alibaba’s integration of ecommerce and entertainment They should at least do that and if they can you know, they should be buying Twitter I don’t know why they’re not bidding for Twitter three pieces. Anyways, that’s sort of lesson number two. Last lesson number three, because I’ve been going on here for a while. Last lesson number three, copy Alibaba in terms of new retail as part of infrastructure. Now when we look at Amazon, we can see the infrastructure that supports their e-commerce business, logistics and cloud. They have pulled those out into two separate businesses that are now their own businesses in their own right, although it’s not clear how far they’re going with logistics. Now Alibaba did the same thing, except Alibaba went one step further. When Alibaba talks about its infrastructure, it says it’s cloud plus logistics plus new retail. They have three components to their infrastructure business where Amazon has two, maybe 1.5 to two. Alibaba moved into this idea we are going to go very aggressive on physical retail. And one, that is gonna integrate with the online retail. So you’re gonna have a better user consumer experience. You know, I can walk into the stores, the fresh hippo stores, or I can use it on my app, or I can walk into their department stores, or their convenience stores, or their mom and pop stores. Yes, that integration of physical plus online retail creates a better consumer experience that is more data-driven, true. But what it also does is it creates the new infrastructure of commerce where. their infrastructure that they can sell to pretty much any merchant or brand that wants to sell anything is we offer you cloud, we offer you logistics, and we offer you a network of retail spaces that are also sort of forward operating nodes for logistics. We can deliver anything pretty much within an hour from our, let’s say, 600 supermarket, hypermarket retail points. So it’s really becoming a part of their infrastructure. both retail plus logistics. So it’s really both. And Amazon has never really done this. They bought Whole Foods. They haven’t done much with it. They did these Amazon Go stores, which are pretty primitive and unimpressive. But they, you know, Alibaba is a good three to five years ahead of them in this regard. They’ve bought department stores. We’ve got shoe stores. We’ve got supermarkets. We got hypermarkets. We got community group buying. I mean, they are just way down the path. And it’s really quite cool. And you can do that in sort of an asset heavy or an asset light approach. JD and Alibaba basically do both. JD may build all its own warehouses, about 900 of them, but they will contract in with another thousand warehouses where they don’t own the asset, but they do the digital connectivity, the infrastructure bit that bring them into the network. So you can do a combination of asset heavy and asset light. Amazon has been pretty asset heavy in terms of Whole Foods. They could start to standardize that and plug that into other retailers. They don’t seem to be doing that. Anyway, so that’s sort of lesson number three. If I was sort of pitching consulting work to Amazon, that’s what I’d pitch. You know, copy, pin, duo, duo, C to M. plus sort of, you know, tick-tock-ish consumer model. Number two, integrate e-commerce and entertainment, and if you can, go after social media. I don’t know why they’re not in this bid for Twitter that if Elon Musk can buy it, I mean, Amazon, they got more money than God. I don’t understand why they’re not going after social media. And then number three, expand your idea of infrastructure from cloud and logistics, which is unbelievable and powerful, new retail and stop viewing them as a consumer experience and start viewing them as more infrastructure. And that’s kind of where Alibaba has ended up. Okay that is kind of my take on this and let me give you a so what. I try to answer all of these with okay this is about winning tech strategy. Are they gonna win? If you’re looking at this company as a manager or an investor, is Amazon going to win? I try and give you a solid answer than I have in the past. And my answer is yes, they are. They are very strongly positioned in terms of strategy. in at least three businesses. They are very strongly positioned in retail. It’s a very impressive business model, don’t kid yourself. They are very strongly positioned in Amazon Web Services, which is another fantastically attractive business. I like both of those businesses. They are very well positioned in entertainment, Amazon Prime. I don’t particularly like this business. I don’t particularly like Netflix as a business. Um. I don’t think there are enough barriers to entry to break into this business. I think it’s gonna be one competitor after another, after another, after another, which you can see, I think playing out in Amazon or in Netflix sort of declining or at least stagnant growth. It is too easy to get into the entertainment business. If you don’t have a platform business model with network effects, which is… YouTube and you don’t have switching costs which are very hard to enforce on the B2C side it makes consumers angry. If you are just doing a linear business model within entertainment I generally don’t like the space. So don’t like that one. And then the third one, their logistics business is I put that as the question mark. Two businesses I really like, one business, eh. fine, they’re doing real well, I don’t really like the business. And then logistics, they’re doing very, very well. And I think that could be a fairly impressive business. So there’s at least, let’s say 2.5 to 3 businesses, they’re strongly positioned in all four. There’s at least 2.5, maybe three that I really like. That’s how I view them. This is a winner in terms of tech strategy. But I think they are at risk strategically. I think the US has very well developed logistics companies like FedEx and UPS. I think they could be a problem. I think the US has other cloud companies like Microsoft that could be a problem. I think Walmart is incredible and other major retailers are incredibly impressive and they could make moves that would sort of upset the Apple cart. As I mentioned, I don’t really care for the linear business models in entertainment. I don’t really like. And then on addition, so you’ve got some major competitors, serious, serious players. And then on top of all of this, you have the wild card. You have Facebook and WhatsApp and Shopify as sort of wild cards that could come in. with a completely counter strategy. You know, you could have Facebook plus Shopify. Suddenly you’ve got social media combined with e-commerce. That would be a very interesting idea, which is pretty much what WeChat mini programs is coming at Alibaba with in China. We’re seeing a very compelling counter strategy that we haven’t seen before. So I think we could see that, but. I don’t really think Facebook is going to execute very well on that. I’m not a huge believer in them, generally speaking. Okay, so that’s kind of my take. Yes is the answer. This is winning tech strategy, but I think there are some significant strategic risks that are right there right now that I keep a pretty close eye on. And that’s basically my take and I think that’s more than enough for today. Again, the concepts for today, I guess it’s really three, purchasing economies, economies of scale and fixed costs, and really should say linked businesses. I think that’s really what a big deal with Amazon. So those would be my sort of three concepts for today. As for me, it’s been a pretty solid week, just sort of plugging away day after day. Um, felt good to sort of finish up this next book. I was, you know, this kind of take a lot of time. get it off your plate you can kind of mentally move on. It’s not that so much time but it takes a lot of sort of mental bandwidth to do a book. It’s good I mean learn a tremendous amount from like writing books and teaching classes really force you to learn a lot but I’m kind of glad that I’m in the final stretch on that. Yeah I’m heading down to Singapore I guess in a couple weeks. I’m gonna talk at the Huawei conference which is should be a lot of fun. Those are meet with some tech companies while I’m down there, so I should have some good stories from that. Plus, Singapore’s always fun. I mean, it’s, I really like, I never wanted to live in Singapore because it’s a very sort of, you know, it’s a little bit like Hong Kong in that sense. It’s just shopping center after shopping center, which is not really my thing. But man, it sure is convenient to do stuff, and it’s such a nice city. So I’m kind of looking forward to that, and the food is spectacular. Like, I love these little corner markets you go to, and these little corner restaurant stalls you know really great so anyways that’s sort of my plan if you’re in the area and you want to meet up and have a cup of coffee or something send me a note I should be in town for about a week yeah oh and as long as I’m asking for favors I’m still trying to think of a better name for this instead of winning tech strategy I think winning tech strategy actually captures the idea quite well let’s understand the strategies that really do win but it’s just kind of it’s I don’t know, I still don’t like the the verbiage on that. It’s kind of awkward to say. If you can come up with a better word than winning. Plus winning has the whole Charlie Sheen association. I guess that’s kind of funny. But if you can think of a better word, I’d appreciate it. Anyways, that is it for me. I hope everyone’s doing well and I will talk to you next week. Bye-bye.