Weaponizing Artificial Intelligence

Weaponizing Artificial Intelligence

As a strategist, my worse nightmare is the disappearance of facts. Note that I don't say Truth. I consider truth a matter of interpretation. Facts, on the other hand, are immutable. They happened, and there is proof.

But what if that proof wasn't so? What if all you rely on, suddenly became untrustworthy?

As I read the newest Artificial Intelligence news, my skin crawls. The more I read, the more scared I become. I've always been pro-AI. One thing though is talking about the future; a different matter is living it. I'm staring into the beast's eyes, feeling its rancid breath and I'm wetting my pants.

The more I piece the little AI crumbles together, the more frightening the picture becomes. Weeks ago I wrote about how fake news was a massive problem. Not because of the propaganda, which has existed forever, but because of the scale of distribution.

I never said anything about the content itself because, to date, fake news is rather elementary. Detecting lies and uncovering them is a matter of basic investigation. However, doing this at scale is a real problem. And it's only getting worse. Twitter started, finally, cracking down on botnets and automation. It remains to be seen how effective the new measures are.

The scary part about fake news is how much it undermines trust. People are getting influenced on a major scale, and this has brutal ramifications for any sector. We're now capable of swinging people's opinion with a single click.

As consumers, we lack necessary tools to protect ourselves. We have to trust the platforms, and oh the irony, they're the first ones that have an incentive not to protect their users from manipulation attempts.

Worse than that, is that brands and organizations are even more exposed than individuals. Their attack surface is more prominent. Their response time, slower. Their trust, already undermined due to the impersonality of the brand.

Few believe that a good orchestrated fake news attack on an organization can make it crumble. Most think their company isn't a big enough entity to offer a good target. Others believe that fake news is simple propaganda articles. Both accounts are wrong. Anyone will be targeted, and the tactics will be brutal.

But if fake news undermines trust, the new crop of AI models, obliterate it. The new set of technologies are focusing on automated content generation. This includes, not only automated image generation, but video and audio manipulation at a level never seen before.

Yes, you could fake a picture before. But it required a semi-expert to make it believable. New AI models (Generative Adversarial Networks), not only edit images at leisure, but create whole new realistic images of people, in one click, and at scale.

Source: Detection of Copy-move Image forgery using SVD and Cuckoo Search Algorithm
Source: GAN image generation evolution. Goodfellow et al. (2014), Radford et al. (2015), Liu and Tuzel (2016), and Karras et al. (2017)

Yes, you could fake audio before, but it required an expert. Now given 15 minutes of audio, you can, commercially, create a new voice you can use to impersonate anyone.

Sneakers (1992): My Voice Is My Passport – YouTube

Current audio manipulation techniques are becoming mainstream. In 2016, Adobe announced VoCo. A text editor for audio. The same year Google's DeepMind released WaveNet, one of the most impressive audio waveforms models to date. In 2017, DeepMind announced near-parity of voice recognition. The same year, Andrew Mason, former Groupon's founder, launches Descript, another audio text editor for the masses.

Yes, you could fake video before, but it required a super-expert. And expert with costly hardware. Furthermore, the results weren't perfect. Experts could pick something amiss with the naked eye. In 2017, Adobe announced Cloak, a one-click shop to make objects disappear from a video. You can't see the difference.

ProjectCloak: Adobe MAX 2017 (Sneak Peeks) | Adobe Creative Cloud – YouTube

Off-the-shelf Open source software is being used to swap faces in videos automatically. You can still pick them as fakes, but there are some critical differences with the past. The software to do this is available to everyone through a point-and-click program. Those using it are amateurs. Professional tuning of the model will lead, rapidly, to a massive jump in quality. When that happens, and it will be soon, fakes will be indistinguishable to humans.

Recent AI models, like Face2Face, are capable of making any face in a video, say anything they want. Their demo video is impressive. Even more remarkable is that they did it with off-the-shelf webcams.

Face2Face: Real-time Face Capture and Reenactment of RGB Videos (CVPR 2016 Oral) – YouTube

But if you prefer, we can synthesize a virtual Obama, indistinguishable from the real one, speaking anything we want.

Synthesizing Obama: Learning Lip Sync from Audio – YouTube

The death of trust

Fake new already frightens me. New content manipulation techniques based on AI, terrifies me.

Being able to reprogram any video, any audio and making it pass for a fact, is bone chilling. It essentially heralds the end of the "seeing is believing."

"Currently, the existence of high-quality recorded video or audio evidence is usually enough to settle a debate about what happened in a given dispute, and has been used to document war crimes in the Syrian Civil War."

The Malicious Use of Artificial Intelligence

Not only it destroys the capacity to rely on particular facts. It throws shadows of doubt on accurate facts. If I can't believe a video or a call or a transcript, then I won't accept anything. Even when you provide a trustworthy proof.

All this might seemed farfetched, but two elements drive the point forward. The automation of creating multimedia manipulations lowers the cost of doing it. When you reduce the cost, you increase the scale and scope.

"The costs of attacks may be lowered by the scalable use of AI systems to complete tasks that would ordinarily require human labor, intelligence, and expertise. A natural effect would be to expand the set of actors who can carry out particular attacks, the rate at which they can carry out these attacks, and the set of potential targets."

The Malicious Use of Artificial Intelligence

AI systems also create a sense of anonymity. The actual manipulator isn't me, but the AI. This creates a distance to the target that increases my willingness to do it again.

“AI systems can allow the actors who would otherwise be performing the tasks to retain their anonymity and experience a greater degree of psychological distance from the people they impact."

The Malicious Use of Artificial Intelligence

So while this future isn't here yet, it's not only feasible but inevitable. My prediction is that during the next year we'll see an increase in the number of fake multimedia content that's being distributed. At a certain point, this content will drop off the face of the Internet. That's the moment where we should be scared. That will mean we've reached peak performance of fake content.

Can AI also protect us?

It's worth noting that we can also use AI systems for defense capabilities. I argued as much on the fake news article. We'll eventually see more companies investing in active cyberdefenses.

The problem with fake content though is human fallibility. We will build systems that can detect fakes, but people will be too lazy to use them. I find it näive to suggest that we can solve the problem through educating the user. Yes, education is a big part of it, but thousands of years of history have proven that people are and will keep on being lazy.

"It is likely to prove much harder to secure humans from manipulation attacks than it will be to secure digital and cyber-physical systems from cyber attacks, and in some scenarios, all three attack vectors may be combined."

The Malicious Use of Artificial Intelligence

The truth though is that, beyond trying to promote a culture of responsibility, there are no realistic detection tools. Several academic papers hint at models that can detect manipulated images or videos. Nonetheless, they don't exist commercially or at scale.

"As yet, however, the detection of misleading news and images is an unsolved problem, and the pace of innovation in generating apparently authentic multimedia and text is rapid."

The Malicious Use of Artificial Intelligence

The non-existence of such detection platforms is a massive opportunity to innovate in this space. On the one hand, we need to build more robust trustworthy proofs-of-fact. Proofs that go beyond "seeing is believing." Decentralized systems like Blockchain are one of the key elements for making higher-trust environments.

Right now, decentralized platforms aren't deemed critical. They will be shortly.

"Centralization has also created broader societal tensions, which we see in the debates over subjects like fake news, state-sponsored bots, “no platforming” of users, EU privacy laws, and algorithmic biases. These debates will only intensify in the coming years."

Why Decentralization Matters – @ Chris Dixon

On the other hand, such proof-of-fact systems need to be integrated into the existing behavior flows of users. Having the technology to prove someone hasn't tampered with our content isn't enough. It has existed for decades now. The challenge is how we make everyone use it transparently.

Apart from proof-of-fact, we need real-time fake detection systems. The challenge is absurd. They need to be able to flag questionable fake content, but not mark artificial legit content. Yes, that's the crux of the problem. AIs will be the authors of more and more content. Some will be legit; others will be malicious. These detection systems need to be trained to spot the difference. Something the current technology giants are wrestling with.

Final thoughts

It's easy to undervalue the threat fake news, and fake content has on society. We always focus on the now; on that which affects us tomorrow.

What does this have to do with my company? With my industry? Everything! I feel like preaching in the desert. It reminds me of when decades ago I used to tell people how critical their cybersecurity was. No one listened. On a post-Snowden-wanna-cry world, it seems companies are finally waking up to cybersecurity.

On the fake content-news front though, most companies aren't taking the threat seriously. Or intelligently. It's a massive opportunity to pivot a company into detecting deceiving content or validating content for your industry.

In a world were content is the blood of the Internet, you want to ensure that the content you produce is trustworthy. Trust will become a prime currency. Those that build products and services to serve the trust economy will thrive.

Moreover, as trust becomes eroded, citizens will start pressuring their governments to adopt new regulations. Government regulations will have unintended consequences. 

"Therefore, we need to buy time for democratic institutions to evolve and adapt to the new reality imposed by technology. This requires aggressive and effective responses from individuals, governments, NGOs, the private sector, academia, and other organizations to address the risks from MADCOMs."

The Madcom Future: How Artificial Intelligence Will Enhance Computational Propaganda, Reprogram Human Culture, And Threaten Democracy.  @ Matt Chessen

Is a lack of ethics the problem with technology?

Is a lack of ethics the problem with technology?

I honestly don't know how to start today's article. I want to talk about ethics and values. Or lack of them. But I'm torn about it because most people don't find it relevant enough. It's not newsworthy. It's not about the next Facebook.

The mission of The Aleph is to bring insight beyond technology. I believe ethics is an essential component of the future we're heading into. Having the right set of values will determine our long-term survival, both as a business and as a species.

The other day, my children got a gift from a friend of the family. It was a book about a mole that gets poo all over his head. He gets mad and starts accusing all the animals of pooing on him. He seeks revenge. He finally finds the culprit, the family dog. He then poos on the dog and runs for safety. Sorry for the spoilers.

"The story of the Little Mole is a tale loved by children and their parents all around the world with more than a million copies sold!"

The Story of the Little Mole Who Went in Search of Whodunit.

I can't even begin to describe how I felt about the book. Don't let go of your anger, look for the culprit and pay them for what they did. An eye for an eye. But hide what you've done and run for the safety of anonymity. Those are the ethical values we're teaching. I'm not sure how anyone would "love" these principles. But it seems there is a market for them.

The same parents that buy such books, then get astonished by my kids. Their tenderness, their willingness to help others and lend a hand to someone in trouble, surprises them. They always wonder why my wife and I are so lucky to have such good kids.

I don't believe in luck. Not in the sense that most people infuse the word with. I believe in values. I believe in ethics. And it shocks me to see how other parents marvel at such a display of respectfulness. It always makes me wonder what is then, their standard for respecting others. After reading the Harvey Weinstein's testimonies, I wonder no more.

It seems I'm not the only one. Last week The New York Times published an article titled "Tech’s Ethical ‘Dark Side’: Harvard, Stanford and Others Want to Address It."

“Technology is not neutral,” said Professor Sahami, who formerly worked at Google as a senior research scientist. “The choices that get made in building technology then have social ramifications.”

It touches upon a theme I've brought up regularly on interviews and roundtables in technology conferences. How responsible are we for the effects our innovations create?

Deep Learning and Machine Learning techniques are increasing the complexity of technology. It's harder than ever, to figure out what potential ramifications our innovations might have.

It still surprises me how deterministic most technocrats still are. On infrequent occasions, I hear a startup founder talking about dynamic systems.

The democratization of technology is enabling access to powerful frameworks to people with very narrow views of the world.

"But until recently, ethics did not seem relevant to many students."

Tech’s Ethical ‘Dark Side’: Harvard, Stanford and Others Want to Address It.

It's frightening to see the lack of social empathy and disregard for the consequences of their products some have. I would argue, it doesn't come from a bad place. Most ascribe to the "Don't be evil" motto. Still, the unwillingness to assume any responsibility is disheartening.

Even within the technology elites, there is this unconscious belief that technology isn't complex. This is a fallacy. Technology is extremely complex. We've gone from a single program in an isolated computer, to a vast global network of multi-parallel computing units. The exponential growth of the system is unrivaled by anything previously built.

This proliferation has turned a determinist automata into a massive dynamic system. We can no longer apply deterministic logic to solve the problems. We need to take a much more abstract and systemic view of things. The system doesn't end with your homepage. The boundaries of the system extend way beyond your company's servers and into our social fabric. Ignoring this fact is one of the reasons for our current social upheaval.

But if understanding the shift of the system's boundaries is already hard, trying to predict the behavior of the whole, is unrealistic. Still, we insist on our knowledge of what our software will do. We strive for scientific precision in a sea of uncertainty. The truth is, despite our best intentions, we can't predict most of the ramifications derived from our products. Not just that. While an error of judgment can be fixed in our software, the consequences of our lack of understanding will have long-lasting implications in society.

“You can patch the software, but you can’t patch a person if you, you know, damage someone’s reputation.”

Tech’s Ethical ‘Dark Side’: Harvard, Stanford and Others Want to Address It.

And here is where the ethics and values come into play. When dealing with systems, there is no deterministic answer. We play with a scale of greys, not black and white. In such ambiguous situations, it's the founder's ethics that shine. It's the employee's values that come forward.

The lack of ethics, the twisted values we impose on our children, have their reflection on the decisions being made by the next generation founders.

This all comes back to the mole and the poo. If we teach our kids that revenge is right; that accusing people is the norm; that you should pay it back; that you should run from your acts; then those are the values that founders will dig when they face unpredictability.

And what does any of this have to do with businesses? It has everything to do with it. I've covered several incidents where the lack of morals was the reason why technology companies were getting in trouble. Uber's lack of ethicsFacebook and Twitter's content quality shortfallsYouTube's absence of moral compass.

As I write these words, I feel I'm falling prey to age. That my words just reflect the maturity of a concerned dad. That generation after generation has said the same. The only argument I can add is that never before in history, a single individual has had the amount of influence some technology founders have now. And while the risk of the absence of an ethical framework has always existed, it has never been so relevant as today.

The fact that Harvard, MITUTCornell, and Stanford are deploying Ethics and regulations courses should be a warning sign. Still, I find it outrageous that only ivy league students get exposed to ethics around Computer Science. This isn't a problem only limited to the privileged classes. And it's also not a problem reserved for Computer Science graduates either. System thinking and ethics frameworks should be taught in school and at home. By every person in society. We are all responsible.

It's easy to fall prey to simplistic thinking and argue that we should apply technology to better people's lives. I reckon most innovators have their fellow citizen's welfare at heart. The truth, though, is that technology's complexity far exceeds our capacity to understand the ramifications of it entirely. This intricacy also has its reflection on regulations. Trying to regulate our shifting landscape with the uninformed opinion of some politicians, doesn't cut it anymore.

We are all responsible.

"The deed done, a happy and satisfied Little Mole disappeared back into his mole hole."

The Story of the Little Mole Who Went in Search of Whodunit.

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Logistic Wars: When A 48-Hour Difference Is All That Matters

It took them five years, but Amazon is finally ready to compete and undercut traditional delivering services like UPS or FedEx.

The company plans to test the new service, called Shipping With Amazon (SWA or a reverse AWS!), in Los Angeles in coming weeks. The move isn't surprising at all. Traditional delivering services have been failing to meet consumer expectation.

"As more shoppers bought products online, Amazon executives concluded that the rate of parcel growth was too large for existing carriers to handle."

Amazon to Launch Delivery Service That Would Vie With FedEx, UPS 

Amazon is doing what they do best, apply technology to infrastructure problems. Once they've mastered their operations, they'll open it for others to use. Delivery As A Service.

My interest isn't much on the service per se but the reiteration of the same maxim. Businesses that don't place technology and more specifically, automation, at the heart of their operations, will be ousted by technology incumbents.

Owning the logistic layer is becoming increasingly strategic in the battle for world domination. Amazon is but one example, but other industries would benefit from it too.

For example, Inditex, the retail behemoth, owns his logistic system and can place orders in less than 48 hours. Apple is another example of critical logistic operations.

As the acceptable threshold of moving goods in less than 48 hours becomes the norm, many of these private logistic operations will become outdated.

Companies built these systems in an era where the expected delivery window wasn't that critical. Not only speed wasn't essential, but expectations were low too. If the system collapsed, no worries, we will outsource the delivery to a third party.

This situation is unacceptable today. Not only the expected delivery window is shorter, but third-party companies can't cope with their workload either.

Source: Deloitte 2016 Survey
Source: Deloitte’s 2017 Holiday Survey

This is why Amazon's move might have a much more profound implication. It's not just about Amazon's reliance on UPS or FedEx. It's the fact that Amazon might become the underlying logistic operator for many industries.

Still, Amazon can't best a tightly implemented logistic operation. Now is the time to invest heavily in upgrading your business's logistic structure. The goal must be seamless scaling capabilities and decreasing delivery times.

There is a need for better automation, tracking, and autonomous technology. On top of this, predictive software, aided by Deep Learning, will become mission critical.

There is also another space Amazon isn't aiming for, that other companies could exploit and defend. Last mile delivery.

It still surprises me the lack of interest and focus most companies pay to the last mile delivery. A user doesn't care how you transport something, as long as it gets to its destination fast enough. Nonetheless, it doesn't mean they don't care about the last mile integration.

Companies need to focus on that part of the logistic chain. They need to create real-time last-mile tracking systems. Predictive models that can optimize for the bests routes for local deliveries. Automatic sorting, scheduling, and management of unsuccessful deliveries.

Startups are dabbling in this space; I know at least a couple just in Spain. However, not enough companies are taking this issue seriously. Product quality isn't the only metric anymore. Product-driven markets are long gone. The current status quo are customer driven markets. And customers care about last mile delivery. Customers care about the delivery experience. Customers care about delivering companies that deal correctly with 'unsuccessful deliveries'.

If you make me chose between a food delivery service that keeps my food warm or a cheaper one that brings it cold, I'm going for the warm one. Telling a customer they weren't home when they were, won't be tolerated much longer.

So I hope Amazon's move serves as a wakeup call for all those businesses that are in need of robust logistic operations. Here are some key points companies need to think about.

  • Invest in upgrading your systems now or face ostracism.
  • Upgrading won't be enough though. Current fast-moving markets require serious innovation of the logistic layer.
  • Design user-friendly customer interfaces so that the end user can track last-mile delivery of your goods seamlessly.
  • Build last-mile predictive models to allow for better delivery routes and resource management.
  • Start investing in the use of autonomous vehicles. Both in the warehouses and for the last mile deliveries. Relying on humans for scale and speed won't cut it much longer

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Amazon’s absolute reign is about to end

Amazon’s absolute reign is about to end

It's not Software that's eating the world; it's Amazon.com. With their stellar 2017 earnings, they're obliterating every market they get into.

As much as I love Amazon, they're becoming increasingly problematic. Their hold on cloud computing, voice control and online retailing is complete.

This tight grip on vertical markets is creating a serious lack of competitiveness. Anyone that wants to go against them faces a nearly impossible task. Those that rely on the Amazon platform are subject to the unyielding grip of the retail titan. It's either sell through them or face oblivion.

As Amazon expands into other vertical markets, more industries will feel Bezos's wrath. Now it's the turn of groceries, logistics and in a very close future, pharma.

Google can't compete with Amazon. Neither can Apple. Amazon's domain seems to be unchallenged. Some are calling for an urgent review of antitrust regulation in the US. But we all know that's a patch. We need an Amazon challenger. 

Apple vs Amazon vs Google vs Facebook stock performance

Is there such company? I am surprised to admit that there is. But you won't believe me. The most likely Amazon nemesis is called Walmart, and it's being spearheaded by one of the smartest minds in the retail space, Marc Lore

The new new Walmart game

I'll give you a little more time to stop laughing. I had the same reaction. Am I serious? After looking at the research, I am. Walmart has taken a 360º change in digital strategy that, not only is working, but it's already putting pressure on Amazon. The emergence of a real incumbent is forcing Amazon's hand. The pressure is creating gaps that others are using to extricate themselves from Bezos's grasp.

Let's start at the beginning.

Despite Walmart's size, they've always neglected their ecommerce business. When you're the top corporation in the world and your market value is 485 billion dollars (35% more than the second largest), the lack of interest is understandable.

"The philosophy created problems on the web, though. Whenever the online price dropped below the in-store price, the merchants in Bentonville would balk. They were worried about siphoning away customers from their stores, which account for more than 97 percent of Wal-Mart’s sales.”

Can Wal-Mart’s Expensive New E-Commerce Operation Compete With Amazon
Forbes 500 2017 List

During the years they've tried different strategies, with mixed results. Meanwhile, Amazon has kept growing at a 24% yearly average, while Walmart barely hits a 1.7%.

The Aleph Report

If both companies maintained the same growth multipliers, Amazon could overtake Walmart in six years. Let me repeat this, six years.

Still, it wasn't until 2015, when Doug McMillon took the Walmart CEO chair, that things started changing in the digital space. McMillon has a very different background from his predecessor, Mike Duke. He's not only 17 years younger but has also been at Walmart longer. He rose from the lower ranks, working on many of the strategic areas that make Walmart the retail juggernaut that is.

I bring this up because Doug McMillon is the person that has enabled the biggest strategic shift at Walmart in more than two decades. That takes, not only an exhaustive knowledge of the organization but incredible courage.

“I want us to sell VR before the customer is ready for it,” he says. “I keep telling our folks, ‘Buy a little and put it online, put it in 50 stores.’ Don’t tell me it won’t sell unless you try it. You gotta catch the wave. And to catch the wave, you gotta be early.”

Doug McMillon – Can Wal-Mart’s Expensive New E-Commerce Operation Compete With Amazon
The Aleph Report
The Aleph Report

In 2016, he made one of the boldest moves the retail industry has seen, the acquisition of Jet.com. The company, one-year-old at the time, lacked positive income and a major market share in the online retail space. 

Similar Web Analysis 2016

The operation raised eyebrows all over the industry. The reason wasn't the acquisition itself, but the price, 3.3 billion dollars

After the acquisition, McMillon promoted Jet.com's co-founder and CEO, Marc Lore, to president and CEO of Walmart eCommerce US. And just like that, Walmart's CEO handed the keys of the Walmart.com kingdom to Amazon's most dangerous nemesis, Marc Lore.

“They were assigned perhaps the most urgent rescue mission in business today: Repurpose Wal-Mart’s historically underachieving internet operation to compete in the age of Amazon. “Amazon has run away with it, and Wal-Mart has not executed well,” says Scot Wingo, chairman of Channel Advisor Corp., which advises brands and merchants on how to sell online. “That’s what Marc Lore has inherited.”

Can Wal-Mart’s Expensive New E-Commerce Operation Compete With Amazon?

Meet Marc Lore

Marc Lore – Inc. Magazine

Marc isn't a stranger to online retail or Amazon. In 2011, he sold his family online retailer company called Quidsi to Amazon for 545 million dollars. He spent two years at Amazon and left the giant as soon as his contract allowed him.

“And it was this really depressing sort of moment where we didn’t even want to go out for a drink. It wasn’t a celebration — it was sort of like mourning. That’s what it felt like. And it was really weird. We were like, ‘Why do we feel so bad right now?’ Like, we just sold this company and made a lot of money, and we just didn’t feel great.”

Marc Lore, (Success!, How I did it BI Podcast) 

The time before the acquisition became an all-out war between Amazon and Quidsi, between Bezos and Lore. In the end, Amazon flexed their financial muscle and beat Quidsi into submission.

After leaving Amazon, Marc took one year off. He was bitter and disappointed with the way Bezos handled Quidsi. In 2014, he came back and started working on an Amazon killer, Jet.com.

“There’s this huge middle class of people that are going to be spending more and more dollars online, and for them, it’s going to be all about price,” Lore says.

Amazon Bought This Man's Company. Now He's Coming for Them

Two years later, he ascended to become Walmart.com's new US CEO. Armed with Jet.com, Walmart.com and a 485 billion dollar war-chest, he was ready for payback

Walmart's online strategy

Walmart has deployed a wide range of strategic changes to aid them in their battle against Amazon.

Inventory

The first ingredient to take on Amazon? Increase your inventory. Bezos's obsession has always been to become the everything store. The first thing you need for that is, well, everything.

Since Lore took over, Walmart.com increased their inventory four-fold, offering over 40 million products. Amazon though, has an inventory of north of 350 million products, nearly nine times more.

Lore knows he can't compete head to head with Bezos. That's why, while increasing the inventory is a priority, Walmart isn't adding just anything.

During the past year, the retailer went on a startup buying spree, acquiring Shoebuy (shoes), Modcloth (womenswear), Moosejaw (outdoor apparel) and Bonobos (menswear) to their marketplace.

Lore is betting on the vertical fashion angle, something he knows Amazon isn't good at. Deep down, the strategic move is brilliant. They focus on niche markets, taking good care of their clients while delivering a great experience. They can't compete on quantity, but they can do it in quality, both regarding customer service and product quality.

Price wars & logistics

The reason why Jet.com fits nicely with Walmart is that they are both driven by the same mission, give their customers the best deal.

“The Jet concept of sharing savings with customers is a very Sam Walton-like idea,” says Richard Cook, co-manager of the Cook & Bynum Fund, which owns Wal-Mart stock. “You will help us lower costs, and we will share that savings with you.”

Can Wal-Mart’s Expensive New E-Commerce Operation Compete With Amazon?

To achieve that, Lore incorporated to Walmart.com two of his favorite tricks from Jet.com. The first one is to increase the customer's average order, so they can aggregate volume and lower the shipping costs. Lower costs mean better prices for the client and better margins for Walmart.

“Shipping one unit is ex-pen-sive,” McMillon says, drawing out the word. “It costs five bucks to ship one item, seven bucks to ship seven. So when you aggregate volume on the supply side, the economics change in your favor.”

Can Wal-Mart’s Expensive New E-Commerce Operation Compete With Amazon?

Another way of lowering the price is taking advantage of Walmart's brick and mortar operations. With 4700 stores in the US alone, the retailer has a massive physical footprint. By levering the existing infrastructure, they can also save on shipping costs.

Do you want to save more on your groceries? Order online, but pick them up at your local Walmart. A classic Jet.com move.

Piggybacking on the current infrastructure is something Amazon can't do. For them to achieve this, they would need to build the physical stores, adding years and billions of dollars to their operation. Lore is intent on exploiting this advantage as much as possible.

"Every day, I become more and more convinced about the omnichannel advantage," Lore said, referring to a sales strategy that combines online and in-store shopping.

Wal-Mart Unveils ‘Store No. 8’ Tech Incubator in Silicon Valley

Segment targeting

They cornerstone of Walmart's new strategy is to segment their audience. Walmart's traditional target has been price-sensitive customers, those looking for the cheapest deal.

While Amazon started with those customers too, they've moved away from that. Their focus is now on their PrimeNow scheme, not on selling the cheapest products. The company now uses massive discounts as a way to pressure and cajole their partners or potential competitors. They can do price dumping if needed, but it's not the general strategy anymore.

Nevertheless, most people are still price-sensitive online. Walmart is combining their lower prices strategy, Jet.com's saving schemes, and a brilliant millennial targeting tactic.

Most millennials don't care much about getting the widest product selection range (29% – 32%). They want products catered to them and them only. They want to feel special. But at the lowest price.

Lore's recent startup acquisitions follow this formula. Smaller product range and saving options for a highly sophisticated audience. A segment Walmart never touched before.

Another example of the same strategy is the launch of the 'Uniquely J' brand. A grocery brand catered to millennials both regarding price and user experience.

Amazon is counteracting Walmart by buying Whole's Foods. The former had certain customer overlap with Walmart. After the acquisition, they slashed prices, in an attempt to poach Walmart's user base and focus on millennials. That's a price war Amazon won't win though. Worse, they devalued Whole's Foods prime segment, wealthy individuals. 

Either way, it's a great bet. Amazon, while good at building horizontal businesses, is bad at personalization. Amazon never got the user experience right. Millennials and the newer generations are very sensitive to this. Walmart and Lore's team have a good chance of besting Bezos to that segment.

Team culture

Another big advantage, often undervalued, is Jet.com's corporate culture. Marc didn't come alone. He brought most of his people with him. People that follow him and that work as a team.

On top of that, Lore is placing each acquired startup CEO as his deputy. Each one manages their company's vertical. Making use of the startup CEO's expertise and empowering them within the larger organization is a great move. Marc is aligning their acquisitions with the overall online Walmart strategy.

This might not seem like an advantage, but it is. It offsets the lack of technology Walmart has. The company is in need of innovation and fast. Nonetheless, acquiring startups without a smart process to assimilate both the technology and the talent, is a recipe for disaster.

Marc's own experience when Amazon acquired his previous company is the perfect example. You spend money, retain the talent for some years and then the churn rate spikes.

If Walmart wants to win this race, they have to bet on the long-term. That means investing in their culture and their people.

Market expansion

Historically, when it comes to international markets, Walmart hasn't fair too well. They've had a hard time in Europe and in Asia, to name a few.

This has changed drastically with McMillon. As I said before, the company's innovation capabilities are small compared to Amazon. Trying to enter fast-moving markets like China, while competing simultaneously with Alibaba, JD.com, and Amazon is insane.

“According to Nielsen, 11% of total retail sales in China come from e-commerce, compared to 8% in the US. And e-commerce sales in China are growing at a rate of 53% annually, compared to roughly 12% in the US.”

Walmart’s future in China increasingly depends on a single Chinese company

This is where McMillon has taken a brilliant path. Instead of investing in building local operations, he's started partnering and buying into the local incumbents. But not any incumbent, but those currently in an open war with the number one online retailer.

In China, Walmart is partnering with JD.com to take on Alibaba. Amazon was already cornered by both Chinese players. Walmart, instead of making the same mistake, is now betting on JD and Tencent, to disrupt Alibaba. Not only that, but JD is bringing the war to Amazon's US turf with help from Walmart too. 

“Meanwhile, Walmart has steadily increased its stake in JD–from 5% in June 2016, to 10.8% in October, and then 12.1% this past February."

Walmart’s future in China increasingly depends on a single Chinese company

In Japan, Walmart just announced a similar move. They partnered with Rakuten to achieve a dual goal. On one side, they entrench themselves in Japan and help Rakuten defend their top retailer spot against Amazon Japan. With Walmart's products getting sold through the Rakuten partnership, the Japanese firm can counteract some of Amazon's Japan allure. At the same time, Walmart is importing the Kobo to the US to both, compete with the Kindle and to increase their online book's footprint.

"The move echoes deals that Rakuten has made to place Kobo e-readers in major bookstore chains around the world, such as WHSmith in the UK. Physical retail presence is a potential advantage for Kobo, which doesn't have the book selection or brand recognition of Kindle but is competitive in terms of hardware — the bigger-screened, water-resistant Aura One, for example, beat Amazon's similar new Kindle Oasis to market by more than a year.”

Walmart and Rakuten take on Amazon with Kobo e-reader alliance

Marc Lore isn't deluded. He knows he won't be able to compete with Amazon in certain categories. However, putting pressure on key Amazon verticals like publishing gives authors, editors, and publishers another potential platform to operate in. This unclenches the grip Bezos has on particular markets. It allows for better deals for providers and a continuous eroding of Amazon's bottom line.

“There are certainly areas where we are playing defense, and we’re behind and need to catch up,” Marc Lore, chief executive officer of Wal-Mart’s U.S. e-commerce business, said at the Bloomberg Breakaway Summit in New York Wednesday. “One example is the long-tail categories that we’re going after with acquisitions.”

Wal-Mart Web CEO Says He's Still Playing Catch-Up to Amazon

Last but not least, Walmart is taking on Amazon in India. They're replicating the same move from China. They're in talks to buy up to 20% of Flipkart, India's Amazon competitor. If you pair this with the recent Softbank investment in Flipkart, it's clear that there is a vested interest to vanquish Amazon from India.

McMillan's vision is clear. To compete with Amazon, they need to win the fast-moving international markets. To achieve that he's focusing on investing and supporting the local players with cash and resources. 

Walmart's Open Innovation approach

Walmart isn't a technology company. Amazon though was born in the midst of the dot com. It's DNA has always been technological. Walmart, on the other hand, has been the quintessential brick and mortar.

As I've pointed out many times though, technology isn't a vertical industry anymore. For a while now, it's become a horizontal industry. One that touches every other industry.

In 2011, Walmart started getting serious with technology and bought, among other smaller companies, Kosmix, a semantic technology company from Silicon Valley.

Kosmix founders became the seed for what's now called Walmart Labs, the innovation heart of the company. The Labs team has produced some outstanding things but still pales in comparison to the Amazon's machinery.

One of the things Walmart Labs can't do is disruptive product innovation. They work in innovating internally, but for a while now, the company has lacked a true outside disruptive engine.

This all changed with the announcement of Store Nº 8, Walmart's startup incubator. More than an incubator, I would say, it's a startup studio. It's an independent entity that enables Walmart to capture innovations from outside the organization. It operates as a bridge, connecting both sides, the startup world, and Walmart Labs.

“The goal is to have a fast-moving, separate entity to spot emerging technologies that can be developed and used across Wal-Mart.”

Wal-Mart's Tech Incubator Hires Co-Founder of Rent the Runway

So far they plan to spin out five ventures by 2019. To date, we know of four of them. The first one, called Code Eight, was unveiled not long ago. Their mission is to build a personal shopping service for "busy NYC moms." Once more, we can see the new strategy pouring over the incubator direction too. Code Eight is one of Lore's experiments in trying to develop new retail experiences for high-end customer segments.

Another of those ventures is Project Kepler, Walmart's attempt at the next generation grocery store. The startup looks very similar to Amazon Go. The fact that Amazon was first to it shows, once again, the innovation speed differential between both.

The incubator is also doubling down on VR technology. They just announced the acquisition of Spatialand, one of the reference VR companies in the world. Walmart has been eyeing VR for a while now. While some of their prototypes were just flashy toys, some of the uses they're exploring are bringing great results.

“He says the company uses Strivr in about 187 employee training centers, for three types of training: preparing for situations like Black Friday or emergencies where you can’t set up a simulation in a store, learning customer service, and teaching operational stuff like how produce should be stacked and arranged.”

Finally, a Useful Application for VR: Training Employees

Technology, Walmart's pending subject

Walmart is far from being a technology juggernaut, but it's doing a great job at catching up. One of the most impressive things is the kind of people they're luring into Store Nº8 projects.

One would think most engineers would balk away from the old-school brand. But it seems Store Nº8 is creating a certain gravitas. I don't doubt for a second that it's another of Lore's effects.

Marc has imprinted Walmart.com with a startup DNA. That's one of the hardest things for a mammoth corporation like Walmart.

Still, Walmart tends to lean on partnerships instead of owning their technology. For the time being this might be good enough, but eventually, it will fail. Controlling your technology stack is critical for the long-term survival of Walmart.

I want to believe these are just the first steps and that in the future we'll see Walmart Labs crack some unique products like Alexa or AWS. To achieve this though, technology needs to become even more prominent, and Walmart needs to think even further into the future. 

Strategy lessons from Walmart

As improbable as it might look, Walmart is the toughest competitor Amazon has right now. Under the McMillon and Lore, the retail giant can bring real thunder to the market, breaking the Amazon yoke.

So far, their strategies, even though they're pretty recent, are paying back handsomely. The next three years will be critical for the fight, and Walmart needs to speed it up if they want to break Amazon.

There are some great strategic takeaways other businesses can use in their markets.

  1. Hire visionaries and fighters. Pick someone that has the experience and the drive and let them do.
  2. Break your core values. No company can change if they keep ascribing to old, nonoperative values. Fast-moving markets and technology requires flexible and reviewed values.
  3. Don't go head to head against someone stronger than you. Make sure you identify the weak spots and focus on them, not on the stronger side.
  4. Identify those things the competition can't do due to their current cost structure. Exploit it.
  5. Invest in your corporate culture. If you want to compete, you need innovators. To retain talent, you need to deserve it. Poaching employees from the competition is easy when your corporate culture is better.
  6. Invest in a technology organization. This one is pretty obvious, but hard to implement. Build a powerful technology stack and use it to deploy future products. Having a "tech" department isn't enough. The whole company has to be technology driven.
  7. Your enemy's competitors are your friends. Find critical markets beyond your local one. Partner with the incumbent and negate those markets to your competitor.
  8. Develop an open innovation approach. Most organizations get this wrong. Open Innovation isn't just about working with startups. It's about building the processes that allow inside and outside innovation to cooperate and deliver future products or services.

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