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No Mercy No Malice

The Fourth Great Unlock

May 8, 2020

4-min read

An unlock is the discovery of an accelerant for the brand, product, or service invisible in plain sight. The mold on cheese curing disease was a substantial unlock (penicillin). So is administering a small dose of a pathogen to immunize someone from the complete, more harmful pathogen (vaccines).

In the last 20 years, there have been three unlocks in the business world that have created over $500 billion in shareholder value. I believe the fourth was revealed last week. So, the first three, in chronological order:

Temples

Steve Jobs zigged when everyone was zagging. He reallocated billions from traditional brand building to distribution, opening stores — temples to the brand. Any great decision seems logical, even pedestrian, in the rearview mirror. But Apple’s move to invest in bricks and mortar flew in the face of every trend. In 2001, stores were dead. Pundits predicted that e-commerce would take over.

The iPhone is the most profitable product in history, not because the product is tangibly superior (the Galaxy is better on many metrics), but because of where it’s sold. Buying a phone at an Apple store is sex with Tom Brady. Buying an Android at a Best Buy, AT&T, or Verizon store is having sex with a guy named Roy on a bad carpet under a neon light tube.

Monogamy

Married households aggregate wealth faster than those headed by a single person. Our superpower as a species is cooperation. When we agree to fully cooperate with someone … wonderful things can happen. In addition to building wealth (the means), you can achieve the ends, producing things that look, smell, and feel like you who are good citizens — why we are here. But I digress.

Firms who are in transactions businesses, like retail, are serially dating. Being single, while it has its moments, is exhausting and expensive. Equinox, Tinder, vodka, and hangovers all tax your time and well-being. Firms that are single and constantly need to be attractive to strangers to repopulate their customer base, are valued at a multiple of profits. Firms in monogamous relationships (recurring revenue) are valued at a multiple of revenues.

In 2005, Amazon decided it wanted to get serious with its customer base and asked for our hand(s). But when they put a ring on it, they also brought a goose, as on the better tables of a Manhattan club, in the form of 48-hour free delivery. Amazon Prime now has a paying relationship with more households, representing more discretionary income (82% of US households), than any private entity globally. Since introducing Prime, Amazon has grown their market capitalization by $1.1 trillion — the value of the auto, CPG, and airline industries.

The Empire Strikes Back

Joe Frazier and Andre Agassi had the most aggressive counterpunch and service return in sport. This, times a 100, is what Walmart has accomplished with click and collect grocery. The retailer recognized that thinking of their stores as assets, while everyone had decided they were liabilities, gave them a strategic path Amazon couldn’t follow. In addition, the NPS on Walmart’s grocery is substantially higher than the in-store experience.

Genius is obvious, only after it was crazy. Walmart realized they had 11,000 well-lit and staffed warehouses that could provide Walmart customers with all the great taste (Walmart grocery) with none of the calories (the in-store experience). The result was a service that might end up being the third biggest business in retail (behind just Walmart terrestrial business and Amazon) — Walmart click and collect grocery. Since introducing click and collect, Walmart has added $100 billion, or the value of the airline industry.

The Fourth Unlock

I believe last week the fourth unlock was revealed. Jeff Bezos, at the outset of their earnings call, warned shareholders they “may want to take a seat.” He has done this several times. “This” is snatching profits from the jaws of shareholders to reinvest in the firm. With the exception of Netflix, no firm has been given this much runway. Bezos has used every foot of it to set aloft a vessel that nobody will likely catch. Imagine a Spruce Goose but at twice the speed of sound.

Bezos told investors that the $4 billion in profits they were expecting would be reinvested. The investment had a theme: Covid-19. Specifically, Bezos outlined a vision for at-home Covid tests, plasma donors, PPE equipment, distancing, additional compensation, and protocols to adapt to a new world. Jeff Bezos is developing the earth’s first “vaccinated” supply chain.

The genius here is breathtaking. Walmart can’t follow, as they don’t own their distribution for last-mile commerce. Outside of Walmart, few firms have the balance sheet to pull this off. Maybe FedEx, UPS, or Prologis? But it’s unlikely they could make this sort of investment, this fast — it would be perceived as reckless.

Great strategy cuts a swath between market conditions and a firm’s assets. Put more simply, strategy is a firm’s answer to the following question:

What can we do that is really hard?

Any customer, vendor, supplier or worker who wants a near-virus-free supply chain, a criterion that has gone from zero to light speed in 90 days, will have a selection set of one. It’s possible the largest new consumer category in history is testing for Covid-19 virus and immunities. Amazon may become the market share leader in this category. I believe Amazon will offer Prime members testing at a scale and efficiency that makes America feel like South Korea (competent). The “vaccinated” supply chain, as tested and safe as possible, will create a more muscular and immune fulfillment organism, offering stakeholders paramount value — real and perceived.

Leadership is the ability to convince people to work together in pursuit of a common goal. Bezos’s decision to spend billions to ensure the safety of his supply chain stems from a vision that’s obvious only after being crazy/genius.

Life is so rich, 

P.S. We’re doing a new two-week intensive Strategy Sprint, where you can get MBA insights without the MBA price tag. Starts June 16, and seats go fast.

P.P.S. The Dawg is on TV! My weekly show premiered on VICE TV last night. You have a week to watch it free. And Josh Brown joined me on the Prof G Show to talk about the markets: by 2009 logic, the market should be down 100%.

51 comments

  1. Rob says:

    This didn’t age well.

  2. c1ue says:

    Maybe if Amazon could maintain competence in their core business (book and retail product delivery), I could have more faith in their new ventures. The quality and timeliness of Amazon has been quite sad in the COVID-19 era. I’ve had more bad experiences in the past 3 months than the entire period from my 1999 start to the beginning of 2020. I’ve literally had 80% of ordered products arrive late – with the champions being a product stated to arrive in 2 weeks, arriving literally 2 months later. Even the automated parts seem broken: the delivery notifications have been flat out wrong (items said to be delivered, weren’t or items delivered but no notification). Why should anyone believe Amazon can execute quality and timeliness in an area which it has zero sourcing control, zero expertise in inventory management, zero subject matter expertise?

  3. GVR says:

    Prof, Galloway, I enjoyed reading “The Fourth Great Unlock” blog, Very humorous, awesome and insightful. Thank you! There is really not a business conglomerate today that compares to Jeff Bezos‘. And there is no one more versed in relationships, monogamy net value/cost than him either. He flies all his business orbits effort less bringing a goose to the table, or not and placing a few rings on prospects…, those are niceties no other business can offer. He can fly a magic carpet of his selection any given moment and that to me is total business acumen. If the final goal is to be prepared for subsequent pandemics, it is commendable. His bisiness can deliver not only to Apple/Samsun home based self-test users but also to the not so technology savvy running to get tested at the local Rite-Aid, CVS, Walmart, state health centers…etc.. My great concern is somewhat resolved. How do we get vaccine/meds to orbit stations? He runs that orbit also. Now we need your insight in resolving how to test what falls and comes from all space orbits, also. Great reading.

  4. Balasubramaniam says:

    Glad to join

  5. Bill Lee says:

    Um, I must be missing something. Doesn’t the market for all things COVID-19 have an expiration date–like around November 2021 (about the time we’re expecting a vaccine)?

  6. catherine james says:

    i worship YOU! Question: To find the unlock for my brand, do i first need to identify what is locking me?

  7. Scott Robertson says:

    I see a big anti-Amazon backlash coming from American consumers and a huge MADE IN AMERICA and BUY LOCAL wave coming. Also adapting your entire business model for what is essentially an exaggerated cold virus is as big of an overreaction as our society’s initial response to it.

    • ken. E says:

      I don’t think the anti-Amazon backlash is that big; it might be loud and attracts a lot of attention but the fact that Amazon has record revenues is more indicative. Same as the buy local sentiment; at the end of the day it is price and value that drives major consumer purchases.

    • Adam says:

      @ken. E Exactly…. people want stuff as cheap as possible and they want it right now. The only backlash will come from the yahoos who are just looking to argue…. and then going online to order more summer yard gear for their home.

  8. Larry says:

    Examples given are correlations but I don’t think they represent causation. Apple is successful due to its innovative and user-experience-based designs plus its marketing and not because of Apple stores. Their growth curve is not necessarily indicative of causation by store planting. Likewise, Amazon’s success is NOT caused by its Prime Membership but, perhaps by its consistency in quick and “some free delivery” regardless of whether these were bundled into a prime membership package or not. Likewise, example of Walmart likewise, in my opinion is flawed. In short, in my opinion, Correlation is not by default Causation.

    • Rob says:

      Isn’t the Apple stores part of Apple’s user experience strategy and feature that makes it stand out from its competitors? And I think Amazon Prime is the main factor why Amazon is so successful and why the purchase rates per member are among the highest in e-commerce; it is the revenue generated by Amazon prime which allows Amazon to invest in low friction purchase processes for its members and serves as an added incentive for member purchases (plus the included reading and video services).

  9. LALIT JAGTAP says:

    Prof, Do you honestly believe Jeff Bezos has created great culture and values for his team? I am engineer my answer is NO. Let’s us visit journey of Amazon in 5 years around 2025. Lalit

  10. Charles kinyanjui says:

    Insightful yet also thought provoking in alot of ways

  11. Sam says:

    Great insights in your Unlock article, especially as it shows how the Covid event accelerated wildly successful Amazon business. The Wallmart curb pickup is working well because they have been working at it for a over a year and it adds no cost to consumer. How about looking at how it can be profitable since products are delivered by truck to old style grocery store, placed manually on shelves, then paid shoppers remove from shelves and move by cart to client’s ride. Seems like Wallmart needs some advice from Amazon on supply chain management.

  12. Gerd Podewils says:

    The no mercy /no malice show doesn’t play in Germany? Bummer! Is that a Vince issue? Or is is the show classified outside the US 😉

  13. Amelya Freeman says:

    An antibody test or vaccine still wouldn’t be enough for me to open a prime account. Paying slightly more for things & not always getting free shipping is the least I can do to help.

  14. Daniel Scalia says:

    Opening up Apple Stores was not the cause of Apple Stock’s rapid rise. Excellence is software programming for the Hardware handset capabilities – designed and manufactured together by single company was the competative advantage. The Stores were both neccesary and obvious for having a communications services business- and they also did a very good job with them, which added value to the brand

    • ED says:

      It’s not necessarily excellence. It’s also timing. The iPod was the first portable music player after Napster showed the music industry that there was HEAVY latent demand for a la carte and portable music that was easy to use thanks to iTunes and due to its own industrial design. The iPhone, while not the first smartphone and quite limited in its abilities when first released, was however, the FIRST smartphone that used natural movements to control the device. Again, a first. And, what made the iPhone so successful is that they stayed lightyears ahead of the competition (at first Windows and BlackBerry and later Android) and didn’t stop expanding on what they had. Now, in 2020, the difference between iPhone and Android is no longer so great, but, Apple still has a giant advantage in that Apple provides 6+ years of support to all phones while the likes of Samsung tell their Galaxy customers to take a hike after 2 years (with only another year of security patches)

  15. SK says:

    I didn’t really get what “vaccinated” supply chain means here. Does it mean broad testing for prime members?

  16. David Bowles says:

    Does this mean they are not “chickenshit” as Tim Bray suggested?

  17. PS says:

    Another good post. The AWS pushback is the key one. It’s given Jeff the funding/cash flow retail can’t/burns. The other point is crazy being genius only works so many times. Can Jeff keep rolling sevens at the craps table forever or does he become Howard Hughes is the longer term question.

  18. JHR says:

    My interest in having sex with Tom Brady is…Zero.

  19. william H casto says:

    I have been listing to you since you came into the public light. I bought two copies of “The Four” giving one to my father-in-law. Love it. I agree with everything you have said. Now what we do about the rest of the world. Love ya man.

  20. jenn s. says:

    “…is having sex with a guy named Roy on a bad carpet under a neon light tube.” Can’t. Stop. Laughing. Bahaha!!!!

  21. Alistair says:

    Hey Prof G, how about the power of Apple’s brand? Clearly, the move into retail was gangster and helped grow the brand in turn — but one shouldn’t overlook the foundational value of that damn Apple logo and all that it stands for.

    • ED says:

      Alistair, it’s not the logo that’s the magic sauce. It’s the whole package. I used Macs for just over a quarter century (1984-2010). I didn’t used them because of the logo. At first I used them because that’s all I knew. But, once I discovered DOS and Windows I continued to use them because they were SO MUCH more powerful AND easy to use than DOS/Windows. It was only when, through work, I shifted to ICS that I shifted to Windows. After 10 years of no Mac in the house I recently picked up a 10 year old iMac i5. Even though it’s so old and slow compared to my current laptops I find I’m using it an awful lot because of the power of the software. And, what’s fascinating to me, my 9 year old son–who’s ONLY ever used Android tablets and Windows touch screen laptops–declared, after only a few days of using the iMac during covid19 homeschooling, that he found the Mac much easier to use. It’s fascinating to me that my observations about computer use of Mac vs. DOS/Windows in the 1980’s and 1990’s still hold true today. Windows 10 STILL requires you to be trained on its use. It’s not easy to DISCOVER things. Mac, still, in 2020 allows for SAFE DISCOVERY. During covid19 I wanted to keep my ‘new’ old iMac for myself so I never showed my son how to do much on it. What does a smart 9 year old do when he wants to try something new? Figures out dad’s password and gets to work doing his school work. My son figured out how to type all sorts of modified keys (e.g. é) using the option key on a Mac in only a few days. I program part time for a living on Windows and know Linux like the back of my hand and I STILL don’t know how to type an e-accent ague. I search for it on Google and copy-and-paste. After being shown command-control-shift-4 on Mac and “Snipping tool” on Windows he declared that he much preferred the Mac way of taking a picture (I quite like Snipping tool even if it’s a lot of extra steps compared to the Mac solution).

    • So true. I started with Mac around same time. And my US born kids have been lucky to use Apple devices. I doubt in their lifetime they will “emotionally connect with Microsoft or Amazon devices”.Today’s world both hardware, software and service has says:

      @ED

  22. bob h says:

    a simple comment : “WOW “

  23. Mike says:

    I’m that guy in your comments disagreeing with you with the same effect as shouting into the void. Apple *is* tangibly better because the hardware and software is better. The hardware holds up far longer, and the app ecosystem is exponentially better. The best app developers in the world develop for iOS because that is where users with money are. If they have time and budget leftover, they work on Android. Apple purpose makes hardware that matches their purpose written software. Android phone makers largely use off the shelf components (to varying degrees) for software that they didn’t write, and largely make worse with their bloatware. Add on top that Apple support is leagues better than any Android mfr. Yes, the tech specs of Android often look better on paper. But, those hardware components are running on software not optimized for them, so you often have worse overall performance. The five minutes I spent on this was too much. Anyways, love your takes, but had to chime in here (speaking from perspective of the owner of an iOS and Android app development agency for over a decade).

    • jhr says:

      Ahhh, the smell of fanboi-dom in the morning…

    • ED says:

      @jhr Mike is right. Apple’s genius that propelled them to most valuable company was not the store but the hardware and first mover advantage. In 2000 they released the iPod. It brought the music industry to its knees because Apple saw the latent demand for portable and a la carte music distribution and decided to build a piece of hardware that ACTUALLY WORKED. Seven years later Apple released the EASY TO USE iPhone. Pure genius! Sure there were other “smartphones” in 2007. BlackBerry had built a great instant mobile messaging service in only a handful of years. Microsoft had the largest share of primitive “smart” phones. NO ONE saw the iPhone coming from Apple (aside from Apple as far back as 1987). iPhone made portable computing EASY (there, that word EASY again): touch the screen with your finger and something happens. NATURAL. No need to remember that there’s an arcane menu controlled by an awkward joystick or type on a cramped keyboard. Google was going to compete with BlackBerry and Microsoft in 2007 with Android. Instead, when they saw the iPhone they REWROTE Android to copy the iPhone. BlackBerry completely failed to respond to the iPhone (it was the only established smartphone player that could have held off Apple). Microsoft took until 2010 to come out with something similar. As for the supposedly ‘superior’ Galaxy line. Prof. Galloway is perhaps allowing his preference to get in the way of his objective analysis. I like Android Google Pixel better than iPhone. But, I like iPhone better than Android Samsung Galaxy. iPhones get OVER 6 years of operating system upgrades. Galaxy phones get 2 years of operating system upgrades. That’s a stunning difference. I’ve owned Galaxies. I’ve owned iPhones. If I had to pay full price for a Galaxy I’d NEVER buy one! In 2020 an iPhone 5s from 2013 is still supported by Apple. A Samsung Galaxy S4 from 2013 was completely abandoned YEARS ago by Samsung. Almost all of the Samsung services have been discontinued for the S4!

  24. Jude says:

    Hmm, I beg to differ. Amazon capitalization growth is largely due to AWS, no? AWS is a “dating” relationship, per your construct, I suppose or maybe it’s “complicated”.

    • David W Crow says:

      I’ll bite: What is AWS?

    • Eric says:

      @David W Crow Amazon Web Services. Absolutely massive portion of Amazon’s business, I think over 10% of revenue, and if it was its own entity in case of an Amazon breakup it would likely be one of the most valuable firms in the world.

    • Kenneth says:

      @David W Crow “Amazon Web Services,” e.g. cloud computing / hosting, which makes up roughly 71 percent of Amazon’s overall operating profits.

  25. Jud LP says:

    Appreciate the insight and newsletter. Walmart can follow. Community health care centers in the stores with cash pay cheaper than anything provided in the market. Last mile can be provided by Uber who is now clearly focused, after today’s announcement, on Uber’s core strength.

  26. Peter says:

    Stopped at Monogamy. Had to comment. Monogamy = Community. Once a customer commits they are showered with all the benefits that come with the relationship. Stray and you are caught curbside with no groceries incoming. Marketing taught us it’s easier to keep (and maintain) than to acquire ( think 50 First Dates). Amazon does this very well, but still room for those who want to join the party. #monogamy

  27. William Daub says:

    Prof. Galloway, I’m very retired and I love your Pod Casts and other postings. I was a poor undergrad and went to night school. The best thing was that my Profs were like your. Seasoned Professionals who had real life experience. Keep up the good work.

  28. Zhivko Chobanov says:

    “Married households aggregate wealth faster than those headed by a single person.” Correlation is not causation, it may be the other way around (B -> A or Z -> B, Z -> A). E.g. people who tend to succeed financially may also tend to succeed in relationships. Or women admire you, because you are capable of making money.

    • ED says:

      “People who succeed financially… succeed in relationships. Or women admire you…” Umm. Umm. Umm. NO. Married households accumulate wealth faster precisely BECAUSE they are married. There are lots of societal supports and subsidies available to married households that are denied to or almost impossible to access by single people. Tax breaks for couples. Income shifting from higher income partner to lower income partner. Shared costs. The ability to TAKE RISKS because your spouse is a safety net–at least one of you will be able to ‘bring home the bacon’. The ability to take the risk to look for a higher paying job that a single person wouldn’t. As for the sexist comment… should I even go there?

  29. Dick Bong says:

    Not really into how the article starts out with the blanket assessment that vaccines are good for people. People who don’t understand where health comes from think vaccines are good. People also believe magic tricks.

    • C'Mon Richard says:

      C’mon Richard

    • ED says:

      “Not really into how the article starts out with the blanket assessment that vaccines are good for people” Really? Are you living in the 17th century? Modern life expectancy is what it is due in no small part to wide spread vaccination rates. Look at the IDIOTS that believe all the pablum about autism and measles. Measles, almost completely eliminated in the 1990’s, has now made a comeback in many parts of the developed world because vaccination rates against that disease have dropped. Ultimately the proof will be in the pudding. Provided a successful covid-19 vaccine is developed (there is no guarantee that one will be developed) we’ll see very quickly how effective it is, and we’ll also see very quickly how strongly the anti-vaxxers believe their nonsense :).

  30. Precha says:

    Ok

  31. James S says:

    How does bezos vaccinate the last mile? My prime packages are still at risk of a snot rocket from Mr. UPS. (the amazon controlled last mile delivery is small fraction of total deliveries).

    • Irish DontLie says:

      Don’t let truth get in the way of a good story, James. Oh, Scott- Apple’s PE delta is a direct result of Icahn. (And illegally melting my irreplaceable battery with the software upgrades).

    • ED says:

      It’s not the Amazon workers or last mile delivery that need to be inoculated–look at the strikes and walkouts that are beginning to happen in Amazon distribution centres around the world because Amazon doesn’t (have to) care (especially when governments in Canada and the US have deemed low paid ‘essential workers’ as collateral damage). The distribution chain needs to be set up to be resistant to disruption by covid19 and to deliver psychological relief from covid19 in the form of a testing kit or a vaccination.

  32. Desiree Reid says:

    I look forward to reading this blog. Always insightful, honest and at times very funny.

    • Mary says:

      Discovery of this site has been one of the few positives of the economic shutdown. Had me at “yoga babble” and I have been enjoying steadily since.

  33. Clayton P Reid says:

    A little surprised no mention of travel and a potential investment in the category. Good stuff though.