Industry Voices—Raynovich: Amazon owns the smart pipes

Amazon trailer
The recent proof comes from the technology earnings season as Amazon solidifies its lead as the world’s most valuable company. (Amazon)

Remember the old argument about smart pipes and dumb pipes? It’s over. Amazon has built the ultimate smart pipe to the consumer. It's carefully crafted a sophisticated customer relationship with the vast majority of customers, whether it’s in consumer retail or enterprise cloud.

And if you are in telecom, forget about it. Amazon can come after you whenever it wants. It’s winning in digital media—and you are losing. That’s because it’s the world’s most sophisticated customer service platform. Think of the Amazon electronic smart-pipe tentacles and Amazon Web Services (AWS) as landing crafts for all manner of enterprise and consumer software and communications services. If you can order your latest printer ink through an Amazon Echo while you stream Amazon Music, why wouldn’t you just do everything else there too?

The recent proof comes from the technology earnings season as Amazon solidifies its lead as the world’s most valuable company with a market cap hovering near $1 trillion. It reported quarterly revenue of $59.7 billion, up 17% year-over-year (y/y.) Net income was $3.6 billion, up 117%.

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Probably the next closest rival to owning the world is Microsoft, which reported quarterly revenue of $32.5 billion, a 12% y/y increase. Operating income was $10.3 billion, an increase of 18%. Some tech companies, such as Apple, actually reported revenue declines on a y/y basis. Google’s stock tanked 8% after it missed its revenue estimate by $1 billion.

Something is happening. Amazon is separating itself from the pack – even when you consider formerly untouchable goliaths such as Google. Google has had trouble breaking out of its core business of advertising and penetrating enterprise cloud, where Amazon leads. Now Amazon is even starting to compete there.

Meanwhile, Amazon appears to do well in just about every new business it enters. Grocery chains are panicking about Amazon’s acquisition of Whole Foods and the significant marketing power it can extend to its existing customers to sell groceries.

The most important reason for this is Jeff Bezos’ and Amazon’s intense focus on customer service and its relationship with the customer. Everything it does, whether it’s selling you an Amazon Echo or Prime subscription, has to do with it developing a more sophisticated relationships with customers to satisfy all of their needs for instant gratification and lock them in. And Amazon is the best at this.

Let’s take a more detailed look at all the areas that Amazon is covering:

Retail Everything: We all know Amazon is the king of retail. But the scale is somewhat mind-blowing. Amazon now accounts for 50% of all online retail spending in the United States, according to eMarketer. Yep, half. When you total up all retail spending, its 5%. And still growing. With its recent move into groceries and retail outlets, it’s entering a new channel to your pocketbook.

Digital Media: Amazon Prime video and Amazon Music. Amazon has made big investments in digital media, including producing its own content. What I’ve noticed lately is that my family has been consuming more Amazon content. I’ve noticed that there is more available content. In fact, when you dig into it, Amazon has five times as many movies as Netflix. Now, Netflix is still a leader, but when you think about how far Amazon has penetrated into digital media compared to other efforts by large competitors (e.g. Apple), it has been impressive.

RELATED: Amazon and Netflix command nearly two-thirds of all SVOD spending: study

Enterprise Cloud Services and Software: By most measures, Amazon is the leader in enterprise IT public cloud services, or infrastructure as a service (IaaS). Research firm Canalys puts the market share of Amazon Web Services (AWS) at 32%. Microsoft holds 16% and Google is at 9%. Amazon’s AWS is growing at about a 45% annual clip. But it’s not just about IaaS. Amazon has launched enterprise services efforts in serverless computing, managed blockchain, artificial intelligence (AI), and Internet of Things (IoT).

Healthcare: Imagine Amazon taking over the world’s fastest growing industry. It’s serious about breaking into healthcare and pharmaceutical sales. It has announced a joint healthcare venture with JPMorgan Chase and Berkshire Hathaway. It acquired online pharmacy PillPack for nearly $1B.

So let’s put things together. Amazon started as a bookseller, and then moved into selling other items, including those from third parties.

After building one of the world’s largest cloud platforms, it used that infrastructure to establish AWS.

It started a generic brand of goods that it can manufacture itself.

It started the Amazon Prime program to suck you deeper into the Amazon world. Amazon Prime was a genius marketing program – once you are in, you are incentivized to buy more stuff from Amazon.

It wants to sell drugs online.

Now it can open and close your garage with an app. And listen to everything you are talking about.

What Amazon means for telcos

There has been a lot of chatter over the years about what this means for the telecommunications industry, but I think the game is over. Owning a “smart pipe,” means having better ways to interact with and deliver things to customers. The smart pipes belong to Amazon, the company that owns the most relationships and has the most expedient way of getting you what you want.

 The telecom industry just runs dumb pipes that deliver profits into Amazon’s coffers.

Whether it’s in the cloud or across the wire, how will telecommunications companies compete with this? AT&T bought Time Warner in the hope that owning more content would enhance its business with its customers, but compared with Amazon, that’s just scratching the surface. And when I try to change my pricing plan with AT&T/DirecTV or CenturyLink, it requires a substantial investment of phone time. AT&T and DirectTV still haven’t even integrated their customer service functions. These companies are terrible at customer service.

It’s a futile war. Amazon’s strategic weapon is that technological focus on customer service that is core to its DNA. The telecommunications providers and most consumer technology companies don’t have this at all. And major changes would be needed to master this.

R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at SDxCentral.com, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original Redherring.com website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.

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