This is the fifth blog post in a series examining industries that have been disrupted by competing technologies and how these industries dealt with these external threats. As this is a series, it’s worth reading this introductory blog post first.
In this example, we’ll answer the question of whether Amazon owns online retail, or if the company itself is facing external threats that will force it to change its strategy.
The “Long Tail” of the demand curve is merely a graphical depiction or outline of a probability distribution. It’s been used by mathematicians and statisticians to determine the most likely outcome of multiple variables. However, it has also found its way into business case study analysis and was used by Chris Anderson in his assessment of Amazon’s success. Anderson used the analogy to explain how Amazon directly confronted large retail outlets like Barnes and Noble.
Amazon redefined how the retail business model should function in an online age. It accomplished this by doing away with separate retail locations. Instead, Amazon used a small number of fulfillment and warehousing locations, strategically located throughout the world, in order to service the direct-to-consumer and direct-to-home market. In essence, Amazon uses a central distribution model with reduced costs, costs that allow it to increase profit whilst stealing market share from retail book stores.
Amazon’s online retail success was built around extending the “Long Tail” of the demand curve by directly meeting consumer demand for small volumes of hard to find, unique, and some would argue, obscure products. Aside from providing hardcover and paperback books, Amazon has further enhanced its product offering through downloadable media and e-book sales through its Kindle reading device. Amazon has also expanded its product offering to include physical media such as CDs, DVDs, and MP3s, electronics and a myriad of other product offerings. In essence, Amazon can lay claim to being the largest online retailer in the world. However, as dominant as Amazon has become, does Amazon itself face an uncertain future?
If one were to divide the “Long Tail” of the demand curve into three distinct quadrants, the first would be occupied by standard brick and mortar businesses. These would include the aforementioned retail outlets like Barnes and Noble and former DVD rental stalwarts like Blockbuster. The second would be occupied by Amazon and Netflix, as well as other entities with similar business models who concentrate on sales of both physical media and downloadable content. However, the furthest end of the curve would include those online entities that provide no finished goods whatsoever. It’s this last quadrant that many pundits envision will be the future model of online retail, one where a digital retail revolution is born and no physical goods are provided at all. Instead, users pay for the right to download content and nothing more.
Anderson’s analysis exposed the inherent weaknesses of business models exposed to online competitors. This ultimately forces companies to adjust their strategies, reduce expenditures or incorporate user-friendly, online services that accentuate their product offering. However, is the future of content one where there are no finished goods, no physical products and everything is downloadable? No, in this case, this isn’t likely ever going to happen. However, an argument can easily be made that the benefit of online retail services like Amazon includes reduced inventory costs and a better, more competitive business model.