The Jeff Bezos Formula for Asymmetric Competition

Today’s announcement of the Kindle Fire, possibly the iPad’s most serious competitor, underscores how Amazon’s Jeff Bezos remains one of the most predictably revolutionary leaders in business.  Selling at just $199, the Fire can accelerate the growth of the already white-hot tablet market through leveraging revenue streams Apple lacks.  It embodies the sort of asymmetric competition that has become Amazon’s trademark.  How does the company do it?

First, consider the legacy preceding the Fire.  Amazon launched as an online bookstore slightly ahead of the dot-com frenzy, and it used a distinct business model to up-end a staid industry.  Through collecting payment from buyers well before it paid suppliers, and by initially declining to carry any inventory itself, it could slash prices on popular titles and still make money through the “float” interest it earned on the money paid by users for purchases.  Bricks-and-mortar chains couldn’t respond.  Then, once Amazon had built up its own distribution centers, it could become a hub for users’ e-commerce needs through selling and distributing products from rival merchants.

Users became increasingly loyal to Amazon even in the hyper-competitive world of Internet retailing, and competitors couldn’t match the scope of Amazon’s offerings because they lacked the scale economies of those centers.  More recently, the firm leveraged its market leadership in selling physical books online to become the dominant vendor of e-readers, leaving potential rivals such as Sony unable to gain much traction.  It has also started to compete against traditional book publishers, offering leading authors a far-better payout on sales if they self-publish under an Amazon imprint.  With a business model predicated on providing these authors with services that many don’t really need, old-line publishers cannot come close to beating Amazon’s terms.  The company is also a revolutionary in businesses where it has lacked much scale; for instance, Amazon’s free video streaming for top customers competes asymmetrically against Netflix’s paid model.

Many of these moves have been audacious, but the Kindle Fire might be Jeff Bezos’ boldest effort yet.  Apple has over 80% of the tablet market and it has left many failed competitors in its wake.  Yet the Fire attacks in ways that past iPad rivals never did.  HP just shipped boxes, without leveraging its large corporate accounts to, for instance, provide very low-cost tablets coupled with big purchases of servers and services that might tablet-enable enterprise software systems.  Samsung ships boxes too, and they are less unique than HP’s.  But Amazon provides a cut-rate tablet, couples it tightly with content offerings it has negotiated from 20th Century Fox and others, and it throws in a trial of its “Prime” service that offers free shipping and more.  The device doesn’t have some of the iPad’s bells and whistles like a camera and microphone, but at $199 many people may not be too picky.

Based on this history, the Bezos formula for asymmetric competition comprises four elements:

1.  Know Your Core: While Amazon’s business keeps changing, the core advantages of the company are remarkably consistent.  Its key asset is a loyal group of customers who rely on the company for understanding their needs, offering an intuitive experience, and providing good value.  This is an asset much like Apple’s (albeit with Apple having different brand values), yet Amazon makes money off this asset in ways that Apple does not.  For all of the praise justly lauded on Steve Jobs, he is more a product innovator than a business model innovator.

2.  Find a New Financial Formula: Amazon has a retailer’s appreciation for how price resonates with customers.  It consistently finds ways to keep the headline price for a new offering low while it makes money in less noticeable ways.

3.  Own the Customer: Amazon partners promiscuously with suppliers of all kinds, but it is crystal clear about owning its customer relationships.  Because it has a direct line to the customer, it can introduce new offerings quickly, winning attention for unorthodox concepts (like the original Kindle) that customers may have ignored without a sharp nudge from Bezos.  The direct relationship also gives Amazon flexibility to adjust offerings rapidly, rather than having to rely on a tangle of business partners such as cellular network operators.

4.  Keep Competitors Off-Balance: Amazon rarely sits on its laurels.  Partly because it operates at the intersection of Internet retailing and consumer electronics, the company faces a huge range of rivals that are always gunning for its business.  It wins through continually changing the game.  Barnes & Noble created a credible rival to the Kindle in its Nook e-reader, but the Nook isn’t close to being the tablet computer embodied in the Fire.  Just as B&N was hitting its stride with a quality e-reader, Amazon has made its rival less relevant (and B&N’s shares fell over 7% on the news).  We can bet on Amazon continuing to change the Fire’s business model just as competitors take aim at what they thought was a clear target.

Jeff Bezos has built a company worth over $100 billion through this approach.  He chose one of the world’s most competitive industries as his playing field, yet because he keeps moving the goalposts he keeps on winning.

Stephen Wunker - Forbes