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 / Summer 2011 / Issue 63(originally published by Booz & Company)


The Thought Leader Interview: Henry Chesbrough

By doing that, they also put the new companies coming out with Android tablets and Android tablet apps at a disadvantage. We’re beginning to see a good library of Android apps become available, but even today it’s not as extensive as the Apple ecosystem. Although I’m sure the time is coming when it will fully catch up, and there will be wonderful stuff.

S+B: What are some other examples of how being open can provide scale and scope?
Amazon illustrates both. On the scope side, being open allows them to give more choices to customers. Amazon allows third-party merchants to use the same tools that Amazon uses to build their own Web pages; the third parties can build the Web pages on Amazon so that the user gets an exactly consistent experience, whether you’re buying books that Amazon sells or jewelry for which Amazon will take your money, but the actual merchandising and fulfillment is done by a third party.

The user gets a consistent experience; Amazon gets the money in advance, so they get that nice cash flow. And for the merchant, Amazon is one of the most heavily trafficked sites out there, so the merchants are going where the customers are. Amazon just had a great quarter in terms of revenues, and the third-party merchants’ revenues were up even more than Amazon’s own internally provided merchandise. Amazon is really benefiting from more of the customer’s share of wallet, so to speak.

On the scale side, Amazon is also interesting because it has to make huge investments to build the extensive server infrastructure to handle all the transactions. And Amazon has been criticized for a long time, especially by security analysts, who say, “Hey, you’re a retailer, why are you spending all this money on R&D and capital investment? When are you going to take your foot off the gas, and give it back to the shareholders?” And instead, Amazon has built this major server infrastructure, and created a new business called Amazon Web Services that hires out that infrastructure to other companies. You can have your website hosted by Amazon Web Services and you only pay for what you use. So if your business is not going well, you’re not getting a lot of traffic, you only pay Amazon a little. If your business starts to take off and you get a lot of traffic, you’ve got to pay Amazon more money — but your business is taking off, so you’ve got the money to pay. And you don’t have to put your own equipment in the ground, hire people to manage it, and all the rest. Amazon is world-class in managing that stuff, and the chances of you hiring people who are as good, and being able to keep that up at the level of availability that Amazon has, are for all but a handful of companies very low.

So companies like Barnes & Noble have essentially given up; they don’t even try to compete on these things. And the companies that compete with Amazon Web Services are those like Google and Microsoft and IBM and a very small number of companies that see these capabilities as fundamental to the cloud computing platform of the future. But Amazon got there long before others did, because they thought about their business much more broadly than as just being a focused online bookseller.

Being open allows you to get economies of specialization; that’s your path for gaining both economies of scope and economies of scale. If Amazon hadn’t been open either to the third-party merchants in the first case or to letting others use its infrastructure in the second case, it wouldn’t have gotten all this. Open services innovation is a key part of how Amazon makes all this possible.

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