Amazon is the world’s largest online retailer, selling a wide variety of consumer goods and digital media
June, a Silicon Valley tech startup launched in 2013, was one of the first pioneers to develop a smart oven.
The oven had a screen for viewing recipes, can be controlled over Wi-Fi and had a camera so that you could keep an eye on your food from anywhere.
June later introduced compatibility with Alexa – a virtual assistant AI developed by Amazon for consumer use. The integration with Alexa allowed consumers to control the smart oven with voice commands. June ovens had become quite popular after its launch in 2016.
The company was doing well and had a good share of the unique market. It raised a series of funding from heavyweight investors such as Slow Ventures, Foundry Group and Eclypse Ventures from 2014 to 2016.
In 2018, June secured an investment from Amazon Alexa Fund, Amazon's venture capital division.
Just a year later, Amazon launched their own smart oven, which had all the features of June – including Wi-Fi connectivity and Alexa integration.
But the kicker is, Amazon Smart Ovens retailed for half the price of June Ovens.
June was selling their ovens for $499-699, while Amazon's ovens cost only $249.99.
The startup suddenly became a competitor of its prime investor, who also happens to be the world's largest retailer that owns the Alexa platform.
On top of this, June has to regularly report its confidential financial information to Amazon.
The story of June might be ironic at best, but it is not an isolated incident. Amazon unveils hundreds of products every year, and they have developed an intricate playbook to put any competitors out of business.
Let's take a look on how Amazon does it.
Treasure trove of data
Good business decisions are based on good data, and Amazon has access to more consumer and supplier data than almost any other company in the world, for free.
Amazon, at any given moment, knows what products people are searching for on their platform under any category, have accurate and historical data on prices and sales volumes, and how consumers are reacting to price changes.
They know how discounts are impacting sales, the logistical challenges of almost any region and how concentrated a market is.
With the treasure trove of data available to Amazon, they can flag products that are doing well in a particular market. Once they have picked a product, Amazon can move onto phase two.
Money not an issue
Manufacturing a good product requires lots of money. Plenty of funds are needed for hiring the best engineers and designers to develop a product, and for manufacturing it at an industrial level.
Amazon's biggest source of readily available fund is their e-commerce business, but not because it is immensely profitable.
The company's margins are slim. But Amazon is so big, it can force suppliers to accept terms that are extremely favourable to the online retailer. Amazon gets money at least 18 days earlier from customers, than it has to pay the suppliers.
Amazon has around 18 days' worth of cash just lying around, at any given time. Some of the company's other businesses – such as Amazon Web Services – have excellent profit margins, which adds to the company's financial strength.
Startups do not have giant piles of cash available to them. These competitors secure funds by other means and by taking out loans, which is expensive because of interest payments.
Amazon's expenses for securing funds are zero, which is a great systematic advantage. Once the company develops a product with their nearly endless cash flow, the phase three begins.
This is absolutely no surprise to anyone that Amazon has quite the competitive edge when it comes to selling products.
To sell their smart oven, June has to make a difficult choice. They can create a web shop to sell their products, spend money on site maintenance, and pay Google and Facebook for advertisement.
Or, they can agree to sell on Amazon, giving them a cut of the profit and request to be promoted on their page. Either of these choices will cost June a large amount of money.
For Amazon, advertisement in their own site costs zero dollars. The company also has a habit of taking money from suppliers to promote their products, then "suggesting" cheaper alternatives manufactured by Amazon itself right beside the advertised product of their competitors.
We already discussed how Amazon gets accurate market research, massive R&D budgets and extremely unfair marketing and sales advantages for their products practically for free, while their competitors pay loads of money in each and every step.
But the rabbit hole goes deeper.
A typical startup must prove it can sell products to secure a steady stream of funds from investors, and then it has to sell their products at a profit to generate revenue and avoid bankruptcy.
But Amazon's products don't necessarily need to turn a profit right away. The company has very deep pockets, they can keep their prices low until all competition dies out, and then create a monopoly in the market.
Plainly put, Amazon can undercut prices of their products for as long as they want. A luxury that startups simply cannot afford.
Most of the time, Amazon does not even think in terms of a single product, but plans ahead for integration in the ecosystem.
They can sell Kindle Tablet computers at a loss, and make up the loss of revenue by selling e-books. They can sell Eco at a loss to consumers, and make the money back from Amazon Music, Alexa and Amazon Prime subscriptions.
Playing the long game
So, selling the Amazon Smart Oven at a loss is fine, because consumers will have to use Alexa and Prime services to use it. Google's AI assistant is not compatible.
For Amazon, its hardware and services are just a tool for customer acquisition. And when a competitor stands in the verge of bankruptcy, Amazon just steps in and buys it out.
Amazon has kept its profit margins in the single digits for decades, and that has proven to be the winning strategy for the company.
Whenever the company has spare dollar in profit, they immediately reinvests it in future growth strategies such as creating a new product and building infrastructure.
Whereas, the investors have learned to trust the judgement of Amazon chief Jeff Bezos over the decade, and fully support the technique of keeping profit margins low for the sake of growth.
Always long term sustainability, over short term profitability. That is Amazon's game.