On June 28, after Amazon.com said it would buy online pharmacy PillPack, Walgreens Boots Alliance CEO Stefano Pessina told analysts he was “not particularly worried’’ about the purchase.
He should be.
Boston-based PillPack built PharmacyOS, a platform that helps people to take multiple daily medicines safely and effectively. It also handles prescription refills.
“PillPack is meaningfully improving its customers’ lives,’’ Amazon AMZN, -0.51% CEO of Worldwide Consumer Jeff Wilke said in a release. “We want to help them continue making it easy for people to save time, simplify their lives and feel healthier.”
Here’s one way Amazon will do that:
“It’s time to take your statin. You’re also low on Flomax. Should I refill that prescription?” “Yes, Alexa.”
“The generic alternative is much cheaper. Should I order that instead?”
For about $1 billion, according to media reports, or about 0.1% of its enterprise value, Amazon acquired instant pharmacy-industry expertise and licenses to operate in nearly every state. Within five years it could feasibly be filling prescriptions within an hour as part of Prime, probably for lower prices than pharmacies offer today.
Walgreens WBA, -0.24% which doesn’t have an artificial-intelligence voice assistant or suitable logistics network, can never compete on that basis because it’s not a platform and likely never will be. Amazon, through its ease of use, choice and service, has reset customer expectations in every market.
The crux of the existential crisis facing companies built before the digital revolution is whether they can transform from selling a service or product into a platform and, if they can’t, whether they can plug into a digital platform for continued distribution.
Successful platforms have five elements: global scale; access to substantial customer data and permission to use it; a product or service that can be provided where, when and how people want it; protection from disruption/startups; and the ability to change as markets evolve.
Netflix Inc. NFLX, +0.41% and Walt Disney DIS, -0.44% are among the few to have made the transition. Just over 11 years after it began to transform itself from a mail-order DVD provider to a streaming service, Netflix in May briefly overtook Disney as the most valuable media company with a market cap of $152.6 billion, and had 130 million worldwide subscribers as of June 30.
Disney also fulfills the five criteria to be a successful platform, especially if it completes the purchase of 21st Century Fox’s movie and TV assets, which would also give it majority control of Hulu. Disney coordinates the operation of physical theme-park, merchandise, retail and publications units with global digital franchises including its eponymous studio, Star Wars, Marvel, DreamWorks and the ESPN and ABC networks.
But those are exceptions. Building a platform that customers want to use is not easy, as shown by General Electric’s GE, -1.43% decision last month to seek a buyer for GE Digital. The company spent billions building Predix, a platform for utility and airline customers that it hoped would help it to become a top 10 software company by 2020 with revenue of $15 billion. It lost money on sales of $500 million last year, according to the Wall Street Journal.
A major reason companies struggle to transform is the inability of executives who earned their MBA degrees in the last century to let go of thinking that revolves around “owning” the customer.
Marriott International MAR, +0.55% CEO Arne Sorenson, talking in June about the topic at the New York University International Hospitality Industry Investment Conference (at his company’s own property in Times Square), said: “We are in an absolute war for who owns the customer.”
What Sorenson fails to realize is that the war is over and that platforms including Booking BKNG, +1.29% (formerly Priceline), Expedia Group EXPE, +0.66% and Alphabet Inc.’s GOOG, -0.02% GOOGL, -0.07% Google have won. Instead of thinking about owning the customer, he has to focus on giving the customer the service they want, while accepting the tolls the platforms charge for access to their customers.
Threat to banks
Like retail and travel companies, large banks such as J.P. Morgan Chase JPM, +0.36% Citigroup C, +0.87% and Bank of America BAC, +0.68% are investing massively in digital and mobile in a bid to protect themselves from the inevitability of Amazon, Google or another platform coming in and stealing customers away forever.
J.P. Morgan is spending $8 billion a year on digital and mobile technology, and in late June announced an app called Finn that targets “digitally centric” younger consumers. Yet it launched only for iPhone users; the Android version won’t be available until closer to 2019, a misstep that Amazon or Google likely wouldn’t have made.
No doubt U.S. banks look fearfully at what happened in China, where Tencent Holdings TCEHY, -1.00% and Alibaba Group Holding BABA, -0.68% are moving toward 500 million banking and insurance users. Alibaba’s Yu’e Bao unit became the world’s largest money-market fund with $210 billion in assets within four years of its June 2013 launch.
The differences between companies that succeed in making the digital transition and those that don’t may become clearer as the era of ultra-cheap money ends. If they were serious about becoming successful platforms, 20th-century business models should have begun making the necessary technology investments more than a decade ago instead of pandering to yield-hungry investors who rewarded share buybacks and rising dividends with higher equity prices.
For companies that have under-invested in their futures, the ramifications are likely to be difficult to recover from.
Brad Slingerlend co-manages the Janus Henderson Global Technology Fund JAGTX, +0.85%