I recently received an email from our hosting provider AWS describing a number of new functions that have been enabled as part of its infrastructure offering (as usual at no cost).
While the email may seem innocuous enough, it should strike fear into the hearts of any application software developer, because it signifies a new stage in the evolution of both AWS and the economics of cloud computing, as well as a quickening of our collective journey towards zero marginal cost.
The World According to Jeff
Anyone who has read the biography of Amazon Founder Jeff Bezos would understand that he has maintained a religious zeal for driving down both marginal cost and prices throughout the company’s 20-year history.
While that journey began with the cost of books, it has gradually broadened to almost every corner of the online retail sector.
However Amazon’s impact on the physical space is nothing compared to the speed and scale of deflation that is now being triggered in the digital sphere, as illustrated by the bitter battle being played out in relation to ebooks.
The Story of Hachette
Hachette is one of the larger incumbents in the book publishing industry.
Hachette and its peers have been locked in a do-or-die fight with Bezos over the future of ebooks.
For Amazon the equation is simple. The marginal cost of delivering an ebook is $0.00, and under those circumstances Bezos is determined to drive prices towards that marginal cost.
Publishers like Hachette and its peers on the other hand are desperately trying to maintain balance sheets that have been built up over decades.
Amazon is now quite clearly trying to disintermediate the publishers and those balance sheets, because if they succeed the price of ebooks will fall dramatically.
(Authors are relatively innocent bystanders in this process, as they may well benefit if more people choose to purchase ebooks).
Amazon Web Services
Nearly ten years ago Amazon moved into (and arguably created) the cloud computing industry.
The move came about because of the need for Amazon to create highly scalable computing infrastructure to support its rapidly growing operations (scalability being essential to driving down marginal cost).
A small team was split off to develop what became know as Amazon Web Services.
Ten years later AWS has hundreds of thousands of clients and is the global standard (being 5 times larger than the next 14 biggest providers combined). They have reduced per unit prices more than 40 times in the last 6 years and introduce new services on an almost daily basis.
Just as importantly, within the AWS ecosystem clients are releasing numerous tools such as Chaos Monkey (originally developed by Netflix, but now freely available on AWS).
This process can be expected to accelerate as the AWS Community continues to grow, amplifying Bezos’ own efforts to drive down costs.
The Role of Market Definition
Market definition is an important concept for both new entrants and incumbents.
To a large extent market definition will determine:
- Who your customers are
- Who your competitors are
When looked at through the lens of market definition the publishers’ stance is doomed to failure, irrespective of the merits of the combatants (or who might prevail in the short term).
Hachette thinks it is in the book publishing business, when in fact they are now in the cloud computing business, and in the cloud computing industry prices have already moved to near zero marginal cost.
Similarly incumbents in the accounting software industry have spent tens (in some cases hundreds) of millions of $$ on the incorrect assumption that they are in the accounting software business – when in fact they are now in the cloud computing business.
Whether directly (by rolling application-style functionality into its own infrastructure offering) or indirectly (by enabling digital disruptors like Mclowd), Amazon is now dissolving market boundaries across a swathe of (what we once considered to be) the software industry.
If they ever met Jeff Bezos and Jeremy Rifkin would have a lot to talk about.
While not directly mentioned in Rifkin’s new book Zero Marginal Cost Society, Bezos and Amazon are playing a central role in the story, effectively laying down the asphalt which is accelerating our collective journey towards zero marginal cost.