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Game Changer

The business world was turned upside down this week by Amazon’s announcement of its nearly $14 billion acquisition of Whole Foods. Supermarket stocks plummeted on the news with uber-analyst Jim Cramer predicting that Amazon will dominate the US grocery market within the next two years. For several reasons, TDG President and Co-founder, Michael Greeson, and I both feel like this deal is a watershed moment worthy of some serious discussion.

1. The ambitions of Amazon and the other members of the ‘Big 5’ (Alphabet, Apple, Facebook, and Microsoft) are staggering in their scope.
As I discussed last week in the context of Apple’s HomePod announcement, resource commitment is the true measure of strategic intent. I think it’s safe to say that paying $13.7 billion in cash to buy a nation-wide premium grocery chain qualifies as a pretty significant statement of intent.

I was fortunate enough to be present at a meeting with Google back in 2007 in which a (then obscure) engineer named Andy Rubin explained to us that Google was going to (1) develop a world class smartphone operating system called Android, and then (2) distribute the source code for free. My jaw hit the floor in that meeting, stunned by the sure size, scale, and audaciousness of the idea. Looking back a decade later, the global impact of Android is undeniable. Today, Andy’s little project powers more than two billion active devices (in a world of ‘just’ 7.5 billion people). As I argued just a few weeks ago, the addition of Google Lens means that Android is now in the position of monetizing reality itself.

I got the same feeling last Friday reading Amazon’s announcement. By tackling the retail food market head on (rather than obliquely via a delivery-only service like Amazon Fresh), Amazon now has a strategic vision that encompasses the entire retail ecosystem, covering trillions (with a ‘t’) of dollars in consumer spending in the US alone. Like looking at the earth from space, from these strategic heights everything starts to look small by comparison. It’s genuinely possible that, from Amazon’s perspective in the not-so-distant future, participation in the $100+ billion US pay-TV market could simply be a loss leader for Amazon Prime, which brings us to our second point.

2. Amazon Prime may well become the most important consumer commercial offer in the world.
As I’ve long argued, big things start small. Credit cards started as a convenient way to pay for dinner. Today there are over 750 million credit cards circulating in the US (in a country of 321 million people), generating over 100 billion credit card transactions a year with a total value of more than $6 trillion (in an $18 trillion economy).

Amazon does not release exact subscription figures for Amazon Prime, but credible estimates put the current US number at roughly 80 million. These users pay $99 per year for the Prime service and spend n average an additional $1,300 per year on Amazon. Quietly, Prime has become the linchpin of Amazon’s entire strategy. Imagine what happens when this is combined with a nationwide network of Whole Foods retail locations. Amazon could offer free delivery of hot, prepared meals for Prime members living within a given radius of a Whole Foods store. Dinner-by-drone, anyone? Freshly packaged make-to-order meal delivery companies like Home Chef and Blue Apron could be in a world of hurt if Whole Foods brands its own such service.

Physical locations open up a whole additional range of services as well. Amazon is already opening retail stores under its own brand (Amazon Go, Amazon Books), and was recently awarded a patent that could be used to prevent so-called ‘showrooming’ in brick-and-mortar store; technology that could prevent in-store shoppers from using their smartphone to compare prices not only with other retailers but with (The nerve!) As well, it’s rumored that Amazon wants to enter the pharmacy business. No reason it couldn’t put a robot pharmacy in the stores as well. How about banking? Amazon’s purchase history for Prime members could easily be leveraged by an AI underwriting algorithm to support lending.

As mentioned above (and certainly of interest to TDG Members), Prime already includes free (i.e., bundled) access to Amazon’s SVOD video service, as well as the ability to add access to Showtime, Starz, and other channels. A burgeoning Prime that becomes a juggernaut on the retail side could plausibly add free access to all of the major broadcasters, as well as subsidized access to a wide range of premium content. The purpose of media inside Prime is simply to reduce churn and keep people inside the Amazon ecosystem as long as possible. Such an offer would be highly disruptive to both legacy pay-TV operations and the new crop of broadband pay-TV services. The threat in both cases is very real: why pay for a separate TV service if my Prime membership includes the basics networks for free and offers premium channels at a steep discount?

The bottom line: the near-term opportunities for Prime to swallow up whole swaths of the consumer economy are, well, staggering, which brings us to our third point.

3. Economic power can (and should) engender a political response.
Amazon’s rise to power within the US economy is an amazing success story, and a testament to the power of technical innovation and sheer entrepreneurial grit. At the same time, however, the power that Amazon (and other members of the Big 5) potentially wields is not without consequences.

Self-driving vehicles will wipe out millions of jobs – from truck drivers to auto dealers and repair shops. The automation of many entry-level foodservice jobs (from counter positions being replaced by kiosks, to food preparation and assembly being replaced by machines) threatens to undermine minimum wage jobs for millions of Americans living on the edge of poverty.

The Amazon-ification of the retail sector will be similarly disruptive. Brick-and-mortar retail is already suffering substantial job losses, and this process arguably hasn’t even gotten started yet. Amazon’s robot-powered retail (along with the self-driving vans or drones to deliver it all) is pretty much certain to need way fewer jobs than today’s supermarkets. The big loser this week was not just Kroger or Albertsons. Amazon’s announcement represents the beginning of the end for grocery cashiers everywhere.

This in no way suggests that we can (or should) hold back the tide of technology innovation. Sorry Luddites, but that has never worked out well. What is clear, however, is that the basic linkage between ordinary human labor and economic activity is starting to break down in fairly fundamental ways. In simple terms, the number of humans that Amazon is capable of feeding, clothing, and entertaining vastly exceeds the number of humans that Amazon needs to employ. Neither technology nor ‘education’ can resolve this basic conundrum of 21st century life. Ultimately, politics will have to weigh in.

Amazon’s acquisition of Whole Foods is the M&A deal of the year, with the potential to massively reroute consumer retail spending. The spillover effects of economic disruption at this scale – both positive and negative – are beyond anyone’s capacity to predict. That said, only a fool would claim that Amazon is not having society-wide impacts, including exacerbating the age-old tension between labor and technology capital.

Stick with TDG and stay ahead of the curve.

Co-authored by Joel Espelien and Michael Greeson.