Back in May 2004, I wrote a commentary titled, “What If UPS Acquires Manhattan Associates?” I used that hypothetical headline to highlight a trend I saw in the industry: the convergence of various business models, namely logistics services, technology, and consulting. And one of my predictions for 2009 was that a leading logistics service provider would acquire a leading logistics software company. That prediction never came true, but the convergence of these business models continues, as evidenced by Amazon.com’s acquisition of Kiva Systems this week.
Why would Amazon.com acquire a materials handling company? Why not just be a customer of Kiva Systems, like Zappos.com and Diapers.com (which are owned by Amazon)?
Here is what Amazon.com said in the press release, which isn’t much, but I believe it offers a small clue:
“Amazon has long used automation in its fulfillment centers, and Kiva’s technology is another way to improve productivity by bringing the products directly to employees to pick, pack and stow,” said Dave Clark, vice president, global customer fulfillment, Amazon.com. “Kiva shares our passion for invention [emphasis mine], and we look forward to supporting their continued growth.”
I believe it’s that passion for invention that drove this acquisition. Specifically, the desire to own and control the innovation cycle — from the front end of its operations (website) to its back end (order fulfillment and DC automation systems) — in a holistic and integrated manner.
In essence, Amazon is taking the same “owning the ecosystem” strategy that Apple took in the computer industry, and that Oracle (with its acquisition of Sun) and Google (with its acquisition of Motorola Mobility) are also adopting.
Here is what Larry Ellison, Oracle’s CEO, said about the Sun acquisition back in 2009:
“Our strategy is to take a lot of separate pieces our customers used to buy as components and to deliver complete working systems. That will make our customers’ lives simpler. It is fast and cost effective.”
“Steve Jobs [Apple’s founder and CEO] is my best friend; I watch very closely what he does over at Apple. If you engineer the hardware and software, the overall product is better.”
Now apply that same philosophy to Amazon and here is what I envision the company saying: “By bringing together our front-end and back-end systems and innovating them in a holistic and integrated manner, we’ll achieve even greater levels of productivity and profitability, and provide even better and more differentiated service to our customers.”
This is part of the reason why some third party logistics (3PL) companies continue to develop their own IT solutions; they want to have full control of the innovation cycle versus being at the mercy of a technology vendor’s innovation roadmap and release schedule. I wrote about this topic last October in “The IT Dilemma for 3PLs,” which sparked some interesting debate. To me, Amazon’s decision to acquire Kiva Systems is another data point in this debate.
Yes, Amazon is investing heavily in distribution centers, and the need to outfit these facilities with automation systems (because adding more labor is not scalable or cost-effective) certainly played a role in the acquisition. But that doesn’t fully explain, at least to me, why they would buy Kiva Systems instead of just growing their relationship as a customer. I believe Amazon’s “passion for invention” and its desire to integrate and own the innovation cycle was a large, if unstated, factor.
What do you think?