Amazon Navigates the Turbulent Waters of IoT

Digitalization and the emergence of smart, connected products are dramatically transforming the opportunities and challenges for a range of industries. Few industries will face greater disruption than retail and supply chain management—two sectors where Amazon has come to occupy a position of dominance. Amazon is already making big bets that the Internet of Things (IoT) will be critical to the next phase of its effort to acquire market share and upsell customers. In particular, the company is moving into this space through three channels:

• Consumer-facing: A number of new product offerings create greater value for consumers by connecting Amazon products both to other products in the consumer’s home and to the company itself. These include “Dash” buttons that automatically reorder staple products from the company, and the voice-responsive Echo speaker.[i]
• Internal Supply Chain: Amazon is integrating greater connectivity into its own delivery supply chain, realizing gains in delivery efficiency and cost savings. This has included developing and rolling out new robotics systems in its warehouses to make inventory management both more automated and real-time responsive, and will likely include delivery by drone in the future. [ii]
• Developer-facing: Taking advantage of Amazon’s formidable capacity in cloud computing, the company has released a package of software tools to allow product designers and software developers to more easily develop and launch new entrepreneurial IoT products that work off of Amazon’s computing platform.

While continued digitalization presents enormous opportunities for growth to the company, it also offers new complications to the firm and areas where both unconventional opportunities and threats could be overlooked. In particular, two strategic recommendations will help ensure that Amazon wins in the next digital era:

Be open to broad systems connectivity: Amazon’s overall growth strategy centers around aggressive pursuit of market share combined with an increasingly vertically integrated supply chain and delivery ecosystem. For example, the “Dash” buttons are designed to bring customers into the Amazon ecosystem to order basic household commodities, thus cutting out traditional suppliers. The greatest potential of the new digital economy, however, lies not in trapping customers within a single company ecosystem but in connecting different ecosystems together. Industry systems that were once entirely separate—such as farm equipment management, weather data and prediction, and irrigation—can now be fully integrated, creating operational efficiencies and greater overall value for all companies and customers involved.[iii] If companies seek only to grow their own ecosystem and push out competitors, the resulting “silo” effect will lead to lost opportunities in terms of integration and responsiveness.[iv] Even as Amazon seeks to cut competitors out of its ecosystem entirely, it seems more likely that other companies will develop products and services that provide complementary and additive value to Amazon’s own products in the IoT space. Cross-system synergies will only be possible if Amazon adopts programming and communication languages that can integrate with those of other manufacturers, such as the language being promoted by the industry group AllSeen Alliance.[v]

Prepare proactively for data security risks: Amazon already manages vast quantities of both consumer and commercial data, and will only continue to acquire more personal data as a wider range of connected products make their way into people’s homes. In particular, as a wider range of home products come online—from medical devices to refrigerators to home entertainment systems—the scale of incredibly personal data about consumer living habits will grow substantially. This trend further underscores the importance of cyber security and dramatically raises the stakes around consumer data privacy. Amazon should take a proactive approach to ensure its customers feel protected and respected in the new data environment, including:

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• Invest aggressively in cyber security infrastructure: A growing number of connected devices means more points of vulnerability through which hackers could access Amazon’s networks, as was made evident in last month’s massive cyber-attack.[vi] Only a heavy and proactive investment in network security can hope to protect Amazon from the cyber warfare arms race
• Work with the customer on data privacy: As a wider range of personal customer data comes online, the risk of data mismanagement or perceived privacy violation grows dramatically as well. Google’s recent clashes with German and other European governments around personal data management provide a clear example of what can happen when an internet giant loses consumer trust in its privacy promise.[vii] To avoid similar issues, Amazon should proactively seek customer input on data preferences and allow for smooth and reactive feedback to its data management systems.

While Amazon’s core competencies and its ambitious forward-thinking approach position it to once again be revolutionary in the newly digitized world, a clearheaded assessment of external opportunities and threats will be necessary to ensure that the company meets its full potential in the new IoT space.

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[i] Carl Krupitzer, “How Amazon Is Becoming a Leader in IoT,” Thinglogix Blog, April 23, 2015. http://www.thinglogix.com/how-amazon-is-becoming-a-leader-in-iot-part-1/

[ii] For more on Amazon’s robotics warehouse initiative, see www.amazonrobotics.com

[iii]Michael Porter and James Heppelmann, “How Smart, Connected Products are Transforming Competition,” Harvard Business Review, November 2014. https://services.hbsp.harvard.edu/services/proxy/content/56157960/56157992/2a598ecac93482e25ffab8d197783259

[iv] “Industrial Internet of Things: Unleashing the Potential of Connected Products and Services,” World Economic Forum Industry Agenda, January 2015. http://www3.weforum.org/docs/WEFUSA_IndustrialInternet_Report2015.pdf

[v] “The Language of the Internet of Things,” The Economist, September 6, 2014.  http://www.economist.com/news/technology-quarterly/21615067-more-and-more-devices-are-becoming-connected-will-they-speak-same

[vi] “’Smart’ Home Devices Used as Weapons in Website Attack,” BBC News, October 22, 2016. http://www.bbc.com/news/technology-37738823

[vii] Ludwig Burger, “German Privacy Watchdog Tells Google to Restrict Use of Data,” Reuters, Sep 30, 2014. http://www.reuters.com/article/us-google-germany-idUSKCN0HP28Q20140930