April 10, 2012      

Readers of Robotics Business Review closely follow the robotics industry, so I am sure that it comes as no news to most reading these lines that on March 23rd Amazon.com, Inc. (NASDAQ:AMZN) announced that it has reached an agreement to acquire Kiva Systems, Inc., the North Reading, Massachusetts, privately-held provider of robotic material handling technology and services. The deal has been approved by the Kiva shareholders and the acquisition is expected to close in the second quarter of 2012.

It is important to note that Kiva Systems is not the only robotics company in which Amazon CEO Jeff Bezos has exhibited interest.

The Amazon/Kiva deal is massively significant for Amazon and the robotics industry in general. Analyses of the acquisition have been numerous and varied, but most make similar points. Other conclusions, arguably the most profound and far reaching, have not been described. They will be delineated here. Before we begin, however, let?s quickly review what Amazon has purchased.

The Solution

Mick Mountz

Kiva Systems CEO and co-founder Mick Mountz has noted that the primary reason for founding Kiva was based on his experiences at Webvan, an online grocery delivery business that flamed out in spectacular fashion in 2001. According to Mountz, the materials handling, fulfillment and distribution solutions of the time were not up to the task for the new generation of ecommerce companies.

Online businesses required solutions that were much more productive and flexible. At Kiva, Mountz has built that solution, and at the same time delivered a truly disruptive technology ? the Kiva Mobile-robotic Fulfillment System (MFS).

With Kiva MFS, the process of pick-pack-and-ship in fulfillment centers is reversed. Instead of having conveyor systems or human operated forklifts moving material through the warehouse, intelligent mobile robots locate shelving containing storage bins with needed items, expand vertically to lift a shelf unit off the floor, and then deliver the material to a human worker at a workstation who ?picks? the required number of items from the bin and then places them in another container for shipping. Since warehouse shelving is not permanently affixed to the floor, as businesses sale up (or down), the Kiva Systems can adjust automatically. There is no need for expensive changes to infrastructure. Compared to traditional methods, the Kiva approach is much more productive, accurate and flexible, requirements all for large online businesses.

Large Online Businesses

In a Forbes magazine article, Kiva Systems is described as ?an obscure and nine-year-old supply-chain robot-maker?. That?s true for the most part, and doubly so for the readers of Forbes. But for Amazon and other large online businesses, Kiva is by no means obscure. According to Kiva, of the top 100 online retailers, more than 10 are using their system. Kiva customers include Staples, Office Depot, Toys ?R? Us, and The Gap. Zappos.com, which was purchased by Amazon in 2009, is a Kiva customer, as is Diapers.com and Soap.com which came to Amazon with the purchase of Quidsi Retail in 2012.

Announcements and Analyses

Kiva is well known in robotics circles, and the announcement had the expected electrifying effect on the industry. Wall Street, business analysts and the financial press are not particularly attuned to the robotics industry, but with the price of the deal $775M in cash ?and the participation of Amazon, the financial community had to take notice. The following trading day Amazon saw a pop in its stock price. Business-to-business publications focused on supply chain and warehousing issues also covered the acquisition.

Jeff Bezos, Amazon

Most post announcement accounts in the press were perfunctory, rehashing the Amazon press release or reposting a single Reuters feed. Serious pieces, and there were a few, actually analyzed the deal from the aspect of robotics, business/investment and supply chain management (here, here, here and here, for examples).

Consensus Opinion

The net-net of the analyses was that the Amazon acquisition was impactful in the extreme. The consensus opinion can be summarized as follows:

  • Robotics Shines – The Amazon/Kiva acquisition raises the profile of robots and robotic technology in the eyes of the business and investment community, and increases the legitimacy of robotics as an investment opportunity. The deal demonstrated a clean, quick exit strategy and software-like ROI to a financial community that is often hesitant to invest in far horizon, hardware-centric robotics start-ups.
  • Advantage Amazon – The investment community views the acquisition as very positive for cash rich Amazon. While the ecommerce giant has experienced explosive growth, that expansion was matched by its cost of sales (41% and 44% for 2011, respectively). The result has been a long history of very slim profit margins. Moreover, fulfillment is a major and growing component of Amazon?s business. The company has reported that in 2011 alone they have built 17 new fulfillment centers, and spent over $4.5B on operations and warehousing. Fulfillment costs as a percentage of revenue has increased during that period. The Kiva technology has proven to reduce the cost of pick-pack-ship operations and increase throughput for ecommerce companies, boosting profits in the process. Applied across Amazon?s many distribution and fulfillment centers, Kiva MPS could have a significant positive effect on Amazon?s profitability.
  • Another Automation Layer – The use of mobile robotics systems by large online businesses to streamline the pick-pack-ship process in fulfillment centers is just the latest example of the ongoing automation of warehouses and distribution centers.

  • More Than Cost Reduction

    A number of financial analysts rightly described the acquisition as a competitive differentiator for Amazon. The company noted that it would continue to make the Kiva technology available to other ecommerce companies (although pricing could change substantially). This begs the question, ?Why didn?t Amazon simply continue to purchase Kiva products and services, or use third-party warehouses that do, instead of buying the company whole cloth? Why a 7X plus multiple on revenue??

    Kiva Systems in action

    It is clear that Amazon considers Kiva MPS as more than a fulfillment solution. It is a strategic asset. The company owns the IP (Intellectual Property) and building a similar product would be difficult in the extreme. Amazon would have early and inside access to new features and functions and could tailor the Kiva solution to its own business model. More importantly (and taking the strategic viewpoint into the stratosphere), Amazon could be taking the first step in a larger architecture play, with the Kiva technology as one piece in a broader warehousing, distribution and fulfillment solutions stack. After all, Amazon and the other larger ecommerce businesses are order fulfillment companies as much as they are anything else. What if Amazon owned it all, and provided its technology, warehouses and solutions to all manner of ecommerce companies as a service?

    At the very least, the Kiva purchase represents a shift in the way that warehousing, distribution and fulfillment operations are viewed. At one time, these back-end processes were considered as cost centers only, albeit ones were dollars could be saved and productivity increased through automation. This tactical attitude has given way to a more strategic viewpoint. For ecommerce companies, rapid, seamless and error free order fulfillment is as customer facing as the online storefronts themselves. The customer experience does not end with a click of the ?purchase? button. In many ways, it has just begun.

    The Other Amazon Robotics Interest

    It is important to note that Kiva Systems is not the only robotics company in which Amazon CEO Jeff Bezos has exhibited interest. As I noted in an earlier Robotics Business Review piece, in 2009 Bezos Expeditions, the firm that manages the personal investments of Bezos, participated in a equity round for Heartland Robotics, the Boston based start-up founded by Rod Brooks, noted roboticist and co-founder of iRobot. Heartland has not been forthcoming regarding its product plans, but it is believed to be developing robots or robotic technology that is (again from the same 2009 RBR article):

    • Designed to automate complex, often highly detailed manual manufacturing processes
    • That is easy to set up and program
    • Capable of being used by workers with a wide range of qualification levels
    • Able to support multiple types of automation
    • That offers a small footprint and is human-scale in size
    • That works collaboratively and in close proximity to human workers
    • Providing fine motor control and supporting dexterous manipulation
    • Employing machine vision, along with force, touch, position, and tactile sensors
    • Boasting multiple arms and possibly a humanoid form factor
    • That is quick to reconfigure, so as to support quickly changing, low production volumes
    Amazon, Phoenix, AZ

    For all of the billions that Amazon has invested in automating its fulfillment processes, it is still dependant on large numbers of people to get the job done. During the holiday season, the company must bring on thousands more. Amazon?s current fulfillment practice comes at great cost, and not all costs are apparent on its balance sheets (see here, here and here).

    The Kiva MSP solution can reduce the number of people required to fulfill orders, while greatly increasing productivity and accuracy. But what if pick-pack-and-ship processes could be further automated ? indeed, much further? To quote the earlier Heartland Robotics piece:

    The Kiva system deal succeeds largely because it reduces the number of humans that must traverse the distribution center collecting products to ship. But what if the model was extended even further, to include the humans who actually ?pick? individual items out of the robotically delivered storage containers? In theory, a dexterous robotic system capable of fine manipulation and using vision in combination with touch sensors (much like its human ?picker? counterpart) could perform the last, unautomated leg of the Kiva fulfillment process.

    Beyond a Paradigm Shift

    Kiva MPS represents a paradigm shift in the way in which ecommerce companies go about fulfilling orders. Moreover, the Amazon purchase of Kiva Systems has had a substantial, immediate impact on multiple groups ? Amazon itself, along with the robotics, investment and supply-chain communities.

    The long-term ramifications of the purchase are not clear, but in the end Amazon could become an architecture provider for ebusiness order fulfillment (own the architecture, win the war). It could also develop fulfillment and distribution centers that for all practical purposes contain no people.

    That?s more than a paradigm shift, it is a seismic change and one with profound implications for businesses and society.

    See RBR50: Kiva Systems