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 businessmodel:
The marginality of an ecosystem that sustains SMEs
Amazon generated over half a trillion dollars in revenue in 2023, of which $231.87B from online stores, over $140.05B from third-party seller services, $90.76B from AWS, $46.9B from advertising, $40.21B from subscription services, $20.03B billion in physical stores, and $4.96B from other sources.
Amazon reported a $2.7 billion net loss in 2022.
Nonetheless, Amazon’s AWS business has incredible growth 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 in 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:
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.
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:
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:
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!
Element
Description
Value Proposition
AWS offers the following value propositions for its customers: – Scalable Cloud Services: Providing access to scalable and flexible cloud computing services. – Reliability and Availability: High levels of reliability and availability for applications. – Security and Compliance: Robust security and compliance measures. – Cost-Efficiency: Pay-as-you-go pricing, cost optimization tools, and economies of scale. – Global Reach: A global network of data centers and regions. – Innovation: Continuous innovation and a wide range of services. – Developer-Focused: Tools and resources for developers and businesses.
Core Products/Services
Core products and services provided by AWS include: – Compute Services: Virtual servers, containers, and serverless computing. – Storage Services: Data storage solutions, databases, and data lakes. – Networking Services: Networking and content delivery services. – Security and Identity: Security, identity, and compliance services. – Analytics and Machine Learning: Data analytics and machine learning tools. – Application Integration: Integration and messaging services. – Developer Tools: Tools for development, deployment, and management. – Management and Governance: Services for managing and governing AWS resources.
Customer Segments
AWS targets various customer segments: – Enterprises: Large organizations seeking cloud solutions. – Startups: Early-stage companies looking for scalable infrastructure. – Developers: Individual developers and development teams. – Government and Education: Public sector entities and educational institutions. – Nonprofits: Nonprofit organizations with specific needs. – IoT and Edge: Internet of Things and edge computing applications. – Content Delivery: Content delivery and media companies. – Healthcare and Life Sciences: Healthcare and life sciences organizations.
Revenue Streams
AWS generates revenue through several revenue streams: – Usage-Based Pricing: Charges based on actual usage of AWS services. – Subscription Plans: Revenue from various subscription plans. – Support and Maintenance: Fees for premium support and maintenance services. – Consulting and Professional Services: Earnings from consulting and professional services. – Training and Certification: Fees for training and certification programs. – Marketplace: Revenue from the AWS Marketplace for third-party solutions. – Data Transfer and Content Delivery: Charges for data transfer and content delivery services. – IoT and Edge Solutions: Income from IoT and edge computing services.
Distribution Strategy
The distribution strategy for AWS focuses on accessibility and global reach: – Data Centers and Regions: Operating a global network of data centers and regions. – Online Sign-Up: Allowing customers to sign up for AWS services online. – Partner Ecosystem: Building a vast partner ecosystem for solutions and support. – Marketplace: Offering a marketplace for third-party solutions and services. – Training and Certification: Providing training and certification programs. – Enterprise Sales: Engaging with enterprises through direct sales teams. – Developer-Focused: Offering developer-focused tools and resources. – Community Engagement: Encouraging community engagement and user groups.
Amazon has a diversified business model. In 2023, Amazon generated nearly $575 billion in revenues while it posted a net profit of over $30 billion. Online stores contributed over 40% of Amazon revenues. Third-party Seller Services and Physical Stores generated the remaining. Amazon AWS, Subscription Services, and Advertising revenues play a significant role within Amazon as fast-growing segments.
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.”
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!
With 64,588,418 shares, Jeff Bezos is the primary individual investor. Owning 12.7% of the company. Other top individual investors include Amazon’s CEO Andy Jessy, who has 94,729 shares. Top institutional investors include mutual funds like The Vanguard Group (6.6% ownership) and BlackRock (5.7% ownership).
Amazon generated over half a trillion dollars in revenue in 2023, of which $231.87B from online stores, over $140.05B from third-party seller services, $90.76B from AWS, $46.9B from advertising, $40.21B from subscription services, $20.03B billion in physical stores, and $4.96B from other sources.
Amazon was profitable in 2023. On nearly $575 billion in revenue for 2023, Amazon generated a net profit of over $30 billion. Since 2014, Amazon hasn’t recorded a net loss, but it did record a net loss of over $2.7 billion in 2022, while it recouped that in 2023. Indeed, in 2014, Amazon reported a net loss of $241 million, and it would be profitable until 2021. In 2022, Amazon turned unprofitable again and highly profitable again in 2023.
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.
Amazon subscription revenue in 2023 was over $40 billion, compared to over $35 billion in 2022 and nearly $32 billion in 2021. Amazon Prime grew from a $4.5 billion revenue segment in 2015 to an over $40 billion segment in 2023.
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.”
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.
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.”
A regret minimization framework is a business heuristic that enables you to make a decision, by projecting yourself in the future, at an old age, and visualize whether the regrets of missing an opportunity would hunt you down, vs. having taken the opportunity and failed. In short, if taking action and failing feels much better than regretting it, in the long run, that is when you’re ready to go!
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model’s success.
Jeff Bezos was best known for founding eCommerce giant Amazon in 1994. However, the entrepreneur owns companies in several industries, including health care, retail, robotics, real estate, and media. Many of these companies have been acquired by Amazon over the years, but some have been the result of direct investment from Bezos himself (through his investment arm is called Bezos Expeditions).
Amazon is a consumer e-commerce platform with a diversified business model spanning across e-commerce, cloud, advertising, streaming, and more. Over the years Amazon acquired several companies. Among its 12 subsidiaries, Amazon has AbeBooks.com, Audible, CamiXology, Fabric.com, IMDb, PillPack, Shopbop, Souq.com, Twitch, Whole Foods Market, Woot! and Zappos.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
