amazon-aws-business

Amazon AWS Platform Business Model In A Nutshell

Amazon AWS follows a platform business model, that gains traction by tapping into network effects. Born as an infrastructure built on top of Amazon’s infrastructure, AWS has become a company offering cloud services to thousands of clients from the enterprise level, to startups. And its marketplace enables companies to connect to other service providers to build integrated solutions for their organizations.

I want to highlight the importance of AWS in the overall Amazon business model and how it has changed over the years.

The importance of AWS on the overall Amazon business model

As I pointed out in this article, “back in 2000, Amazon was trying to figure out a way to allow other stores to build their e-commerce on top of Amazon. That is why the Amazon team came up with an e-commerce service at the time called Merchant.com. However, they soon realized that it was impossible to do that on the existing Amazon‘s infrastructure.”

That’s how Amazon AWS came to be. From that attempt to scale up Merchant.com infrastructure, the company managed to build instead an infrastructure that powers up an ecosystem of small and medium businesses.

Today Amazon AWS, although a separate unit within Amazon, is a crucial contributor to the company’s overall profitability, as pointed out in the infographic below:

In this article, I want to point out three key elements of the Amazon AWS business model:

The marginality of an ecosystem that sustains SMEs

is-amazon-profitable
Amazon was profitable in 2021. The company generated over $33 billion in net income, primarily driven by the Amazon AWS business, which contributed to over 55% of its operating margins and other profitable parts like Amazon Prime and Ads. The Amazon e-commerce platform runs at tight operating margins since it’s built for scale.

When you first look at AWS margins; the first thing you notice is how a company built on top of another platform (Amazon) has incredible margins.

Indeed, when you look at the growth of the margins for AWS, you realize how what was once an infrastructure, has become a company and a platform business for its own sake.

That was possible, thanks to the scalability, implicit to its model.

A scalable platform

Once built the infrastructure, the rest is about network effects. Amazon knows this well, as it engineered its flywheel or virtuous cycle to scale the company to monopoly proportions:

amazon-flywheel
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

The company is applying its expertise in building up ecosystems on top of Amazon’s business model to build an entrepreneurial ecosystem that powers up the IT of countless numbers of companies.

It’s about the ecosystem

It’s important to highlight that when a company scales to the proportion of Amazon, it moves away from the traditional business model, toward the platform business model.

A platform business model follows a set of logic, which are relatively new, compared to traditional organizations.

Where traditional companies of the past built value on top of a value chain, made of verticalizing their supply chain (take the Luxottica case), to gain as much control as possible on the means of production, a platform business model aims at creating network effects.

Thus, the more it enables its key stakeholders (drivers – riders in Uber’s case, buyers and sellers in Amazon’s case, hosts and guests in Airbnb’s case, and so forth) to connect, and transact in a frictionless manner the more those repeated interactions and transactions drive up network effects.

To make sure a network effect implies that a platform becomes more and more valuable, the more users join in.

Thus, an additional user doesn’t become more expensive for the platform business, instead, it makes the service more valuable for others joining in later, and it lowers up transactions cost associated with the platform.

Therefore, it becomes cheaper and better.

Amazon AWS in particular powers up thousands of businesses, from small to enterprise, both in the private and public sectors:

aws-customers

For instance, on the Amazon AWS site the company points out how “Expedia is all in on AWS, with plans to migrate 80 percent of its mission-critical apps from its on-premises data centers to the cloud in the next two to three years.”

Or how decacorn startups, like Airbnb “decided to migrate nearly all of its cloud computing functions to Amazon Web Services,” and as its CTO and co-founder pointed out the trigger was the “ease of managing and customizing the stack.

It was great to be able to ramp up more servers without having to contact anyone and without having minimum usage commitments.”  

As Amazon AWS becomes the infrastructure for thousands of startups and SaaS companies, it shares its distribution capability by integrating other services providers to enable other companies to benefit from solutions that go well beyond the cloud.

Thus looking at AWS just as a cloud service, that is limited as it has become way more than that:

amazon-aws-marketplace

Thus, the AWS marketplace becomes a provider of other companies services and products on top of its cloud infrastructure.

That enables its platform to scale further by creating a market that didn’t exist before while scaling it up altogether!

Read next: 

Connected to Amazon Business Model

Amazon Business Model

amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues, and Physical Stores.

Amazon Mission Statement

amazon-vision-statement-mission-statement (1)
Amazon’s mission statement is to “serve consumers through online and physical stores and focus on selection, price, and convenience.” Amazon’s vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” 

Customer Obsession

customer-obsession
In the Amazon Shareholders’ Letter for 2018, Jeff Bezos analyzed the Amazon business model, and it also focused on a few key lessons that Amazon as a company has learned over the years. These lessons are fundamental for any entrepreneur, of small or large organization to understand the pitfalls to avoid to run a successful company!

Amazon Revenues

amazon-revenue-model
Amazon has a business model with many moving parts. With the e-commerce platform which generated over $222 billion in 2021, followed by third-party stores services which generated over $103 billion, Amazon AWS, which generated over $62 billion, Amazon advertising which generated over $31 billion and Amazon Prime which also generated over $31 billion, and physical stores which generated over $17 billion.

Amazon Cash Conversion

cash-conversion-cycle-amazon

Working Backwards

working-backwards
The Amazon Working Backwards Method is a product development methodology that advocates building a product based on customer needs. The Amazon Working Backwards Method gained traction after notable Amazon employee Ian McAllister shared the company’s product development approach on Quora. McAllister noted that the method seeks “to work backwards from the customer, rather than starting with an idea for a product and trying to bolt customers onto it.”

Amazon Flywheel

amazon-flywheel
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

Jeff Bezos Day One

jeff-bezos-day-1
In the letter to shareholders in 2016, Jeff Bezos addressed a topic he had been thinking quite profoundly in the last decades as he led Amazon: Day 1. As Jeff Bezos put it “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

Read Next: Amazon Business Model

Leave a Reply

Scroll to Top
FourWeekMBA