Chain of Thought

Amazon's Kiva Acquisition is Self Defense

Amazon's acquisition of Kiva Systems is big news, not only for the sky-high $775 million price tag, but for the deal's implications for both Amazon and its competitors. First of all, it positions Amazon's competitors to be potential customers if they wish to buy the same bot-based order fulfillment system Amazon did to help it improve operations. Could that be considered a conflict of interests if it meant getting into some kind of systems sale to, say, Wal-Mart?

John Hill, material handling industry veteran and newly appointed director of the St. Onge Company, wasn't as curious about that as he was about how Amazon would protect its intellectual property rights.

“If KIVA has the only, or the better, ‘mousetrap' for a given set of requirements with an attractive value proposition, I would think retailers would be unlikely to dismiss the company simply because of the Amazon connection,” he told me. “The question for me would be how well protected is Kiva's intellectual property? I doubt that Jeff Bezos would have paid such a high multiple without very solid IP protection and a thorough assessment of the implications for Amazon's position in the retail marketplace.”

Amazon has been giving its competitive position a lot of thought over the past couple years, and judging by its 2011 annual report, was quite worried about it--particularly in regard to logistics.

“If we do not adequately predict customer demand or otherwise optimize and operate our fulfillment centers successfully, it could result in excess or insufficient inventory or fulfillment capacity, result in increased costs, impairment charges, or both, or harm our business in other ways,” it stated. “We and our co-sourcers may be unable to adequately staff our fulfillment and customer service centers. … If the other businesses on whose behalf we perform inventory fulfillment services deliver product to our fulfillment centers in excess of forecasts, we may be unable to secure sufficient storage space and may be unable to optimize our fulfillment centers.”

So it seems that the Kiva acquisition was one of Amazon's answers to these concerns. Two years ago other industry analysts were wondering if Amazon might be Kiva's next customer after the e-tailer bought and Quidsi Inc., a couple companies that used Kiva robots. The latest turn of events reminds me of that old Remington shaver ad in which Victor Kiam said of the product, “I liked it so much, I bought the company.”

Mr. Hill's comment about the intellectual property involved in this deal is on-target. When Amazon was contemplating its options with Kiva there were reports that Amazon coveted the company's software code so it could better integrate the system with its order fulfillment processes. So now that Amazon is on the brink of owning the whole shootin' match, why wouldn't another party have designs on those rights too? Sounds like China, doesn't it?

And speaking of China, that was another area of concern for Amazon, according to its annual report. It was worried about its business arrangements there.

“In order to meet local ownership and regulatory licensing requirements, is operated by Peoples Republic of China (PRC) companies that are indirectly owned, either wholly or partially, by PRC nationals. Although we believe these structures comply with existing PRC laws, they involve unique risks.”

Wonder if putting Kiva robots to work there would be one of those.

Related Editorial:

Amazon to Acquire Kiva Systems for $775 Million

Keeping Up with the E-Giants

Tech Companies Have Supply Chain On Their Minds

The Top 25 Supply Chains of 2010

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