Amazon’s Ultimate Business

Amazon is one of the most valuable companies in history. It is one of the top 10 companies in the world in terms of valuation. With a market cap of $954 billion (July 2019), Amazon stock (AMZN) trades at a staggering number nearing $2,000. The company is one of the Big Four or the Gang of Four along with Apple, Facebook, and Microsoft making up around 11% of the US Stock Market.

Amazon is known to most of the public as an online retailer. It competes by having an incredibly fast and efficient delivery system, offering one day deliveries and free shipping. To achieve this, Amazon operates highly automated warehouses, in addition to incredibly efficient logistics and delivery system. In brief, Amazon is the holy grail of e-commerce in they eyes of the public. The lesser known side of Amazon to the public is Amazon web services (AWS), which we will talk about in detail later, which make nearly half of Amazon’s revenue.

Now let’s flashback to 1994, Jeffrey P. Bezos, a 30 year old ex-Wall street investment banker, started Amazon using 100,000 USD from his parents savings. The company grew from being valued at $463 million in 1997 to being valued at $1 trillion in 2018, that is a growth of 200,000 %. To put this into rough numbers, if someone bought $20 worth of Amazon stock during it’s debut in 1997 and held into it until the 2018’s peak these stocks would be worth $23,000. Although this is an incredible growth story, Bezos started Amazon with more hopes than becoming rich. Bezos wanted everyone to use his website to make all purchases online. Along with his personal success came a marriage saga which ended tragically by a divorce that resulted the world newest and richest female billionaire.

Back to Amazon’s business, the story here is kind of simple when you look into high level figures. Amazon Web Services (AWS) generates revenue and profit, it hosts 5% of the internet and dominates cloud services. Theory is, Amazon uses AWS profit to acquire smaller, newer, promising, and competitive businesses. In the e-commerce business area, Amazon encourages sellers to sell and advertise on it’s platform, and while doing so it squeezes seller’s margins, via price competitions, and if a product is very successful Amazon will launch a similar product that will kill all competition. This strategy was criticized and is seen as boarder line manipulative and monopolistic, even though it benefits the public consumers by offering good products at a lower price.

Nonetheless, the story of Amazon is far more complicated than being an e-commerce monopoly or a giant cloud and hosting service. Amazon’s value comes from it’s effective use of data in its operations. This is not something new in the business world, companies like P&G have been using consumer data for the past 20 years to build strategies to dominate and create long term sustainable profits. In Amazon’s case it is a combination of using in-house consumer data at a very large scale and the utilization of machine learning in order to dominate. Amazon’s advantage, and ultimate business goal, is successful by using automated highly efficient systems that learn and understand customers likes and dislikes, sentiments, and make good predictions about future needs. While doing this Amazon sells its products like Fire TV, Echo show, and Echo dot that provide more data about their customers. Amazon will also sell customers on Amazon Prime video, and services like Alexa and Amazon cloud, to learn more about users while bringing in extra revenue.

Taking a step back here is a boiled down version of Amazon’s business:

Amazon is a great company in the eyes of the US consumers, especially young professionals, and for the IT industry. They provide fast and reliable services that truly add value to the consumer, most of the time. On the e-commerce front, the company is successful in expanding its reach and offering lower prices and better services than other available online retailers. Additionally, Amazon keeps introducing new products and services that help make life easy. On the internet front, Amazon operates a reliable cloud for the internet and offers great prices for a diverse suite of services ranging from hosting, computing, cloud, and even machine learning.

However, this comes at a price; Amazon’s large scale business operations introduces tax implications, anti-trust issues, issues to some workers, and problems for small businesses owners, and retailers. Amazon’s potion makes it very hard for new e-commerce players to enter this space, be competitive and succeed.

Amazon’s business is a complex topic. The company is large, controversial, and holds a lot of promises for the future of retail and trade around the world. The company is becoming more important and valuable in many people’s lives. It is undeniable that Amazon has helped make life easier for many people. The key here is to keep this sustainable and only the future can tell that.