Chapter 1: Bezonomics CHAPTER 1 Bezonomics As she wakes in the morning, Ella asks Alexa to brew her coffee, check the weather, and order groceries from Whole Foods to be delivered to her apartment that evening. Ella is twenty-six years old and has hardly known a world without Amazon. She bought all her college textbooks used from the website, then sold them back. Although she's had an Amazon Prime subscription since she was eighteen years old, she still feels an endorphin surge when she comes home to find a package on her doorstep sealed with Amazon-branded packing tape. After breakfast, Ella takes the subway to her office. For her work, she searches for Bluetooth keyboards; no surprise, Amazon has the best selection. She clicks twice and knows they'll be at her desk the next or maybe even the same day if she really needs them fast. She backs up important company files on the cloud built by Amazon Web Services, researches small-business loans offered by Amazon Lending, then gathers her team to discuss her start-up's next major milestone: launching a new product on the Amazon site. That evening, on her way home, she stops at a cashier-less Amazon Go store to pick up a snack, and when she leaves, sensors and cameras automatically charge her Amazon account for what she carries out. She returns home, where she asks Alexa to read her a recipe for dinner. After eating, she relaxes by asking Alexa to play the Amazon Prime Video hit The Marvelous Mrs. Maisel on her TV, and then falls to sleep reading her Kindle. Ella is a fictional character, but the world she lives in is very real. We all know that many others like her exist in the Amazon ecosystem--Amazon Prime members in America pay $119 a year for the privilege of being fully enmeshed in it. Millions of Amazon's products can be shipped to them in seventeen countries in two days or less for free. Not all Amazon shoppers, however, are Prime members. Around the globe, an estimated 200 million additional online shoppers have, whether they realize it or not, signed on for Bezos's operating system for life. And Bezos has only started to penetrate world markets. The company is extending its tentacles through Europe, India, Africa, South America, and Japan. Only in China, with its formidable homegrown digital giants Alibaba and Tencent, has Amazon been thwarted. To the person on the street, Amazon is a business that delivers lots of stuff in little brown boxes. Walk down an avenue on any given afternoon in L.A., London, or Mumbai and you'll see Amazon's smile boxes piled up in lobbies or dropped at doorsteps. A former Amazon executive who served for a decade in high-profile positions at the company told me that what Amazon is really doing is creating a new operating system that will be broader and more pervasive than Apple's iOS or Google's Android. "Everything we did at Amazon," he said, "was about becoming a tightly woven part of the fabric of [people's] lives. We did that on Amazon.com and now here comes the Amazon Echo with Alexa, who tells us the weather, plays music for us, controls the lights and cooling in our houses and, yes, helps us buy things on Amazon.com. We're getting to the point where there is going to be a massive integration. Amazon is becoming an operating system for your life." It's hard to fathom just how popular and addictive and all-encompassing Amazon has become. During the 2017 holiday season, three-quarters of Americans who shop online said they would make most of their purchases on Amazon. The next closest destination was Walmart.com, with 8 percent saying they'd do most of their shopping there. U.S. Post Office trucks in suburban areas made extra runs to deliver the stream of Amazon packages. In some areas, mailmen started their routes at 4:00 a.m. to keep up with the volume. On New York's Fire Island, the local ferry each morning was taking so long to unload Amazon deliveries that some ferry riders had to take an earlier boat to avoid missing their commuter train to New York City. In an age where people are losing trust in our institutions, Amazon has earned deep respect. In 2018, the Baker Center at Georgetown University asked Americans which institutions they believed in the most. Democrats picked Amazon above all others--quite surprising, given the mounting attacks from the Left targeting the company's tough warehouse working conditions and its ability to squeeze large tax breaks from local governments and the fact that it paid little or no federal income tax in 2017 and 2018. The Republicans polled picked Amazon third after--no shocker--the military and the local police. Whether Democrat or Republican, those surveyed respected Amazon more than the FBI, universities, Congress, the press, the courts, and religion. That perhaps helps explain that while 51 percent of American households attend church, 52 percent have Amazon Prime memberships. The reverence for Amazon runs particularly deep among the millennials and Gen Zers. The Max Borges Agency polled 1,108 people from the ages of eighteen to thirty-four who'd bought tech products on Amazon in the last year. An astounding 44 percent said they'd rather give up sex than quit Amazon for a year, and 77 percent would choose Amazon over alcohol for a year. This, however, might reveal as much about the lifestyles and sex drives of millennials and Gen Zers as about Amazon's allure. That kind of stellar reputation among consumers translates into dollar signs. A ranking of the world's most valuable brands, released in mid-2019 by the data firm Kantar, a division of the advertising giant WPP, put Amazon for the first time at the top of the list. Its brand, Kantar estimates, is worth $315 billion--up by an impressive $108 billion from the previous year. Amazon beat out Apple and Google for the top spot. The company outpaced both Alibaba and Tencent by more than a two-to-one margin. Amazon has become so addictive that it's now taking a significant share of Americans' income. The company siphons off 2.1 percent of all household spending--or some $1,320 for a U.S. family that earns $63,000 a year. The main reason consumers open their wallets for Amazon is that it saves shoppers the time, hassle, and expense of driving or taking public transport to a store to purchase mundane items such as diapers or batteries. A case in point: when Charlotte Mayerson, a retired book editor living on Manhattan's Upper West Side, needed new batteries for her old landline phone, she hopped a bus to the nearest Best Buy for a replacement. The helpful clerk said: "Best Buy does not carry that battery, but I'd be happy to help you out." He walked to his computer screen and ordered the woman her replacement batteries--on Amazon. Even some shoppers who despise Amazon can't live without it. Nona Willis Aronowitz, in an op-ed for the New York Times , said that on principle she hated Amazon because of the reports she'd read about the way it treated its warehouse workers. Yet, after her eighty-five-year-old father, who'd been a labor activist at one point in his career, had suffered a debilitating stroke, Aronowitz came to depend on Amazon for making sure her house-ridden dad had everything he needed--from physical therapy balls to cheap tubs of protein powder. Aronowitz saw using Amazon as a "deal with the devil," yet wrote of her father: "He can't shop on his own, and his caretaker can't spend her life going to specialty pharmacies and medical supply stores. So Amazon Prime has been his lifeline." No one has any hard statistics on the topic, but there's plenty of anecdotal evidence that some shoppers develop a psychological addiction to Amazon. At one point, a forty-year-old man in Saco, Maine, had his account suspended for returning too many smartphones--Amazon's algorithms secretly decide who is worthy and who is not. The man spent months trying to get himself back in good standing. After much pleading to an Amazon customer service employee, his account was finally restored. As he told the Wall Street Journal : "It was dizzying and disorienting. You don't realize how intertwined a company is with your daily routine, until it's shut off." For some time now, scientists have known that using social media platforms such as Facebook, Twitter, and Instagram can be addictive. Every time someone's phone pings with a notification announcing the latest number of likes or an enthusiastic comment, the brain releases dopamine, a neurotransmitter that among other things can trigger a sense of pleasure. Users get used to these little highs and compulsively check the site to see if someone has commented on their latest post. Sean Parker, the founding president of Facebook who resigned from the social media company in 2005, once explained that to hook its users, the company exploited a "vulnerability in human psychology. Whenever someone likes or comments on a post or photograph, we . . . give you a little dopamine hit." Both adults and children are susceptible to Internet addiction although the phenomenon is particularly evident in children who become glued to their screens at a time when they should be developing social and reading skills. It has reached the point where some Silicon Valley titans won't let their kids use phones or at least strictly reduce their access to these devices. Chris Anderson, the former editor of Wired and now the chief executive of a robotics and drone company--hardly a Luddite--expounded upon children and screen use in a New York Times interview: "On the scale between candy and crack cocaine, it's closer to crack cocaine. Technologists building these products and writers observing the tech revolution were naïve. We thought we could control it, and this is beyond our power to control. This is going straight to the pleasure centers of the developing brain." While social media sites such as Facebook, Instagram, and Twitter can cause social and psychological problems, Amazon is responsible for aggravating an equally serious phenomenon--shopping addiction. So powerful is its allure that some people get caught in a kind of compulsion feedback loop with dire financial consequences. The 1-Click buy button is the equivalent of getting a ping of affirmation on Facebook or Instagram. But instead of a "like" from a friend, a person with a single click knows they'll get a reward--a package arriving at their home in a day or two with some item they desire--the equivalent of receiving holiday or birthday gifts throughout the year. So, they get a double hit of dopamine--one when they click and the other when the doorbell rings with a delivery. Some have become financial victims of Amazon's compulsion feedback loop. April Benson is a New York City psychologist who specializes in shopping addiction. In the course of her research she discovered some serious cases of addicted online shoppers, including a middle-aged woman named Constance from Long Island who recently filed for bankruptcy after accumulating $150,000 in debt. As Constance told Benson: "I don't know what it's like to be a crack head, but shopping is my crack. . . . I work 7 days a week to support my habit. . . . Something's got to give." Shopaholics are not new, but the Internet has made it easier to become one because of the convenience of shopping online. The Max Borges Agency poll of millennial and Gen Z shoppers found that 47 percent have shopped online while using the bathroom, 57 percent while working, 23 percent while sitting in traffic, and 19 percent while drunk (although one might have thought that the number of besotted shoppers would be higher). One high school teacher in the Northeast said she'd occasionally sit in bed drunk, buy stuff on Amazon, and not remember the next morning what she ordered. The addictive ease of shopping by the press of a button or with an Alexa voice command means that some shoppers might simply end up buying more junk than they need. The other day I found myself ordering on Amazon a stainless-steel coffee canister that had a carbon dioxide vent to keep the grounds fresh. Who even knew that CO2 was a threat to coffee, and why did I care? I bought it anyway. The more we know we can buy, the more we buy. Online shopping is also a great way to procrastinate at work. Tired of designing that spreadsheet or writing that memo? Somehow your brain reminds you that you really do need a new pair of flip-flops for your upcoming weekend excursion to the beach, and off one's fingers go to Amazon. One reason shoppers get hooked on Amazon is that they can find pretty much anything they want. In fact, as of 2018, Amazon and the millions of third-party retailers who sell on its site listed an estimated 600 million products worldwide. That's more than eight times the number of products offered by Walmart, the largest brick-and-mortar retailer in the world, which offers 120,000 items in its Super Stores and roughly 70 million online. A deep dive into the Mariana Trench of Amazon's website dredges up some curiosities. Shoppers can buy a sixteen-color, motion-activated toilet bowl night-light ($9.63); a men's black silicon wedding band ($12.99 for a four pack), for the budget-minded and apparently pessimistic groom; Honest Amish Beard Balm Leave-in Conditioner ($11.43); a live, sexed pair of Madagascar hissing cockroaches ( Gromphadorhina portentosa ) for $13.50, but alas no longer available; and my favorite: a pillowcase imprinted with a photo of a bare-chested Nicolas Cage ($5.89). The item earned 239 reviews and a four-star rating. As one happy reviewer named Kara said of her purchase: "I feel so protected knowing that Nicolas is in bed with me." And it's not all tchotchkes. Shoppers can order a three-and-a-half-ton power lathe for $35,279, which weighs more than a Ford Expedition and gets free delivery--but one has to be home to receive it. Also eligible for free delivery: a 674-pound GM engine--no assembly required--a set of 300-pound barbells, and a quarter-ton gun safe. One customer warned that free delivery does not include lugging this heavy safe up a flight of stairs. Because Amazon has access to prodigious amounts of data regarding which categories of products are selling well, it's extremely well positioned to sell its own products, and it's doing just that. When the company sees that a category like blue cashmere sweaters or smart microwaves is popular, it finds a manufacturer to produce it under its own brand. The classic example is AmazonBasics batteries, which compete directly with Eveready and Duracell and often underprice those premium brands. In 2016, the company had about twenty private label brands, including AmazonBasics and its women's contemporary line, Lark & Ro, and the kids' clothing label, Scout + Ro. By 2018, that number had grown to more than 140 private label brands, including Rivet for midcentury furniture and Happy Belly for food and beverages. House brands have the potential to become a big business for Amazon. Amazon's private label sales hit $7.5 billion in 2018, according to analysts at SunTrust Robinson Humphrey. By 2022, they are expected to hit $25 billion. Though the surveys suggest that most shoppers love Amazon, there's mounting anecdotal evidence--especially among some millennials I interviewed--that the Amazon search results are getting too crowded with sponsored items and Amazon "picks." The clutter, they say, turns them off. Then there's the feeling of being overwhelmed by the sheer volume of products offered. It's hard to get one's brain around the vast wasteland of online shopping. Type in "running shoes" and a shopper gets more than seventy thousand results. Which one to choose? I have no idea. With the emergence of fake reviews as well as reviewers who are offered free products in exchange for their opinion, it's hard to know which product is superior. Ironically, research suggests that shoppers who have fewer choices make better choices and are more likely to buy. Sheena Iyengar, a professor of business at Columbia University and the author of The Art of Choosing , conducted in 1995 what she called "the jam test." She set up a table in a California market with samples of Wilkin & Sons jams. Every few hours she switched between a selection of twenty-four jams and a group of six jams. She found that about a third of the people who sampled the smaller assortment ended up buying the jam compared to only 3 percent who had to select from among twenty-four jars. Too much choice can be debilitating. As much as Amazon's customers like being able to order almost anything on the site--including Nicolas Cage pillowcases--it's the fast and accurate delivery of those items to their doorsteps that keeps them coming back for more. Recently, a pile of Amazon boxes I deposited next to my trash bin was so big that I received a $120 charge from my garbage company for an oversized pickup. Fortunately, most cardboard box material does get recycled into new boxes and other paper products both in the U.S. and abroad. However, the amount of greenhouse gas emitted in making and delivering all those smile boxes has become a real concern. Since Amazon's inception, Bezos has been driving down the delivery time of what the company sells. When Prime was introduced in 2005, members got free two-day delivery on certain items, and the company has been expanding the number of items eligible for Prime ever since. In early 2019, it announced that it was working on converting its Prime free two-day shipping program to a free one-day shipping program. For those who need things even quicker, Amazon offers Prime Now, in which members get free same-day delivery on more than 3 million items on orders over $35. Besides the U.S., same-day has been rolled out in Australia, England, Germany, and Japan, among other countries. (The most popular item for Prime Now deliveries is bananas. Who would guess?) In 2018, Amazon delivered 2 billion items in one day or less, and the delivery times are getting shorter and shorter. A Nintendo NES Classic was delivered to a customer in Kirkland, Washington, and a High Sierra Loop backpack to a shopper in Charlotte, North Carolina--both in nine minutes. Nor is Amazon content to fully depend on the local post office or delivery companies such as UPS to move their packages over that crucial last mile from the warehouse to the customer. In 2018, Amazon said it would buy twenty thousand Mercedes vans to launch a program whereby entrepreneurs could, with Amazon's help, start their own local delivery companies. The company also has a program called Amazon Flex that makes it possible for Uber and Lyft drivers to deliver packages. It's also experimenting with drone deliveries. It made its first such test delivery in England in 2016 when a drone carried an Amazon Fire TV and a bag of popcorn to a customer near Cambridge. From the time the customer clicked the buy button to the time the drone landed at his home was only thirteen minutes. As big as they are, UPS and the U.S. Post Office aren't big enough to handle the surging flood of deliveries. Amazon is amassing a fleet of container ships, jumbo cargo jets, and tractor-trailer trucks to create what it hopes to be one of the world's most robust shipping companies. In an initiative called Dragon Boat, Amazon has leased its own fleet of container ships to import items from Chinese factories. It's building an air-delivery service called Amazon Air that will have seventy cargo jets deployed by 2021. In late 2018, the company announced that it was building an air hub shipping center at the Fort Worth Alliance Airport. This is no idle threat. As the company was beefing up its shipping business, Morgan Stanley lowered its outlook for the stocks of FedEx and UPS because Amazon would likely eat into the growth of those two giants. One key to fast delivery is to build warehouses near where Amazon's customers are, whether that's Hertfordshire, England; São Paulo, Brazil; Osaka, Japan; New Delhi, India; or Tianjin, China. As of 2019, Amazon operated 175 warehouses around the globe and it keeps expanding, even buying up abandoned malls and turning them into fulfillment centers. In early 2019, it bought two malls in the Cleveland area that were near the city center, already had electric, water, and parking, and were adjacent to a bus stop for warehouse workers who couldn't afford cars. The scale of Amazon's distribution network is hard to grasp. From its massive complex of warehouses, Amazon shipped an estimated 3.3 billion packages in 2017, the equivalent to sending a parcel to nearly half the world's population. In 2018, that number is expected to rise to 4.4 billion packages, which adds up to 12 million packages a day. Today's shoppers want not only fast delivery but also the option to either buy online or browse in a real store. With its $13.7 billion acquisition of Whole Foods in 2017, Amazon is in a position to become a leader in a new hybrid form of retailing that promises to disrupt traditional brick-and-mortar retail. Whole Foods' five-hundred-plus stores give Amazon's customers the choice of ordering groceries online and having them delivered to the home, or putting them in their trunk on the way home from work. A year after the acquisition of Whole Foods, press reports suggested that Amazon would build a national chain of lower-cost grocery stores to compete more directly with Walmart and Kroger. One expert suggested that Amazon convert abandoned Sears locations into their new grocery stores. The company is striving to operate on a smaller scale, too. As of 2019, Amazon operated forty-two of its own physical retail stores, including Amazon Go, Amazon 4-star, and Amazon Books. So far Amazon has opened only fifteen Go stores, where shoppers can buy sandwiches, salads, and drinks without checking out. Ceiling cameras scan purchases and charge them directly to the shoppers' Amazon account. Weights in the shelves determine whether the person has returned the item. The stores have proved popular, and the company says it will keep rolling them out. Wall Street analysts predict that the Go Stores will be a multibillion-dollar business by the middle of this decade. While Bezos has built the most expansive and powerful online retail operation in the world and now threatens brick-and-mortar stores, that's only part of the story. A new pattern is emerging that is threatening businesses in other industries. As Amazon invents something to please its customers, as it pushes the AI flywheel a little harder, it often ends up creating a product or a service that becomes a business of its own. This is what has enabled Bezos to enter one new industry after another, from cloud computing to media to consumer electronics. It's what has many in the business world worried--and they should be--that the Amazon AI flywheel could come crashing through their industry. Over its two decades of existence, Amazon invested billions in making its site the most intuitive and dependable online shopping destination. The company then took some of the programming talent and computer expertise that it used to build up its online business and created its cloud service, AWS. Cloud computing lets businesses and individuals use the Internet to store, manage, and process data on large server farms instead of on a local server or a personal computer, and it's one of the fastest-growing sectors of the tech industry. Amazon was one of the first to market with its cloud service in 2006. As of 2018, AWS remains the largest cloud company in the world with revenues of $35 billion, making it the most profitable in Amazon's suite of businesses. In the mid-2000s, Bezos came to the conclusion that offering Prime members a free streaming video service would be a great way to attract and retain customers. He launched Prime Video, and since then the service has created scores of original television programs, including Tom Clancy's thriller Jack Ryan , Homecoming with Julia Roberts, and The Marvelous Mrs. Maisel , which won multiple Emmys, including Outstanding Comedy Series. In 2019, Amazon spent approximately $7 billion on original programming and music, making it a major force in Hollywood. That number still trails Netflix, which spent an estimated $15 billion on original content that year (more than any Hollywood studio), but it means Amazon is playing to win. Amazon offers its streaming services in more than two hundred countries. Netflix, with 104 million members, has more subscribers, but industry watchers say that Amazon, with 27 million of its Prime members watching its video service regularly, is starting to close the gap. That's thanks to deals like the one Amazon struck with the NFL in 2018 to stream ten Thursday Night Football games. Maybe Amazon's Prime members would like free music. In 2007, Bezos launched the streaming service Amazon Music--free for Prime members. A decade later, the company spawned Amazon Music Unlimited, a paid service with 50 million songs and curated playlists. It's now a direct competitor with Spotify, Pandora, and Apple Music. As Steve Boom, the vice president of Amazon Music, told The Verge : "I see us as one of the top global streaming services. I expect us to grow faster than everybody else." And wouldn't it be nice, thought Bezos, if his company could make ordering products, listening to Amazon Music, and watching Amazon Video easier for its customers. That led to the introduction in 2014 of the Amazon Echo with its AI voice assistant, Alexa. The Echo has sparked nothing less than the biggest shift in personal computing and communications since Steve Jobs unveiled the iPhone. The Echo uses artificial intelligence to listen to human queries, scan millions of words in an Internet-connected database, and provide answers from the profound to the mundane. Alexa, named for the ancient Egyptian library in Alexandria, can take musical requests, supply weather reports and sports scores, and remotely adjust a home thermostat. By 2019, Amazon had sold a total of nearly 50 million Echo devices globally. Other companies are selling tens of millions of Alexa-capable products. Amazon had long made Kindles, Fire TVs, and other consumer electronic devices, but it's now moving into manufacturing Alexa-controlled security cameras, microwaves, and lightbulbs. Amazon has become a major consumer electronics company. And that's just the beginning of the disruption Bezonomics is causing. The threat that Amazon poses doesn't stop at retailing, cloud computing, media, and consumer electronics. The company is moving into finance, health care, and advertising. When Bezos applies his AI flywheel to these industries, many competitors are likely to be ground into dust or at best lose significant market share. Take as just one example, health care. In 2018, Amazon partnered with Warren Buffett's Berkshire Hathaway and JPMorgan Chase to form a nonprofit dedicated to reinventing health care for the 1.2 million employees who work at the three companies. The head of this new initiative is the renowned Boston surgeon and New Yorker writer Atul Gawande. Amazon aims to use this laboratory to find new ways to disrupt the sector. What the health-care industry needs is lower prices and better customer care, and that's exactly what Amazon does best. In 2018, the company acquired PillPack, an online pharmacy. Amazon could also build pharmacies in its Whole Foods stores, not only offering low prices but also employing its predictive analytics and customer data capabilities to track and influence patient behavior. In the near future, Amazon's Echo and Alexa could give the company a leg up in telemedicine. It could create a vast platform for new voice-activated services, such as helping patients book physician visits. The video capability of its new Echo Show device with its ten-inch screen could make virtual house calls a reality. Amazon's deep AI capabilities could help doctors more accurately diagnose their patients. Alexa already delivers first-aid information and offers tips for keeping yourself healthy. Adding tasks such as auto-refills for prescriptions and medication reminders would not be a stretch. CVS Health, Humana, UnitedHealth, and other health providers should be worried. As Bezos applies his AI flywheel to new domains, he will change the rules of business dramatically. Big data, AI, and an extreme focus on the customer will become mere table stakes. Anyone competing with Amazon must realize that business as usual won't hack it. They must learn to embrace the fundamentals of Bezonomics or find safe harbors where they can operate outside of its impact. It's not possible to fully grasp the implications of Bezonomics without understanding the man behind it. Jeff Bezos left a lucrative job at a Wall Street hedge fund in 1994 to start an online bookstore. A little more than twenty years later, he'd built one of the most valuable companies in history and become the world's richest man. A desire to make money, however, wasn't what drove him to those heights. Excerpted from Bezonomics: How Amazon Is Changing Our Lives and What the World's Best Companies Are Learning from It by Brian Dumaine All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.
