why-amazon-is-doubling-down-on-aws

Why Amazon Is Doubling Down On AWS

Back in the year 2000, Amazon’s business model was facing scalability issues, primarily due to its massive infrastructure growth.

More precisely, Amazon was looking for a way to allow merchants to build their own e-commerce on top of Amazon.

This would later become a critical strength and competitive advantage for Amazon.

That is also why, with “really no fanfare,” Amazon started to put together the infrastructure that would later become Amazon AWS.

Today Amazon AWS is a company’s separate segment, and it made over seventeen billion dollars in revenues!

Related: Amazon Business Model Analysis

Amazon AWS’s expenses are primarily comprised of its technology and content costs. Throughout the years, Amazon has doubled down on that.

Amazon AWS changed the whole profitability of the company. From a company running at tight margins, AWS became a segment with a huge impact on growth and profits. 

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.

Amazon, over the years, has been using an aggressive strategy of expansion. What I like to call continuous blitzscaling

In fact, in a blitzscaling scenario, a company defends its market position by attacking competitors. It’s an effective strategy, especially if a company is threatened. 

Yet, Amazon has been using blitzscaling as a default mode. By aggressively expanding from books to adjacent niches with incredible speed.

Amazon’s business model, indeed, is skewed toward customer obsession. This leads to lower prices, wider selection, and extremely fast delivery for customers. 

Yet, this might go at the expense of suppliers, third-party stores on Amazon, and delivery partners.

By looking at Amazon’s revenue model over the years, it is easy to appreciate how Amazon AWS has grown in importance for the overall Amazon business model:

amazon-revenues

As the successor of Jeff Bezos, Andy Jassy, CEO of Amazon (which had been in charge of AWS since the onset) explained, in the 2021 shareholders letter: 

When the pandemic started in early 2020, few people thought it would be as expansive or long-running as it’s been. Whatever role Amazon played in the world up to that point became further magnified as most physical venues shut down for long periods of time and people spent their days at home. This meant that hundreds of millions of people relied on Amazon for PPE, food, clothing, and various other items that helped them navigate this unprecedented time. Businesses and governments also had to shift, practically overnight, from working with colleagues and technology on-premises to working remotely. AWS played a major role in enabling this business continuity. Whether companies saw extraordinary demand spikes, or demand diminish quickly with reduced external consumption, the cloud’s elasticity to scale capacity up and down quickly, as well as AWS’s unusually broad functionality helped millions of companies adjust to these difficult circumstances.

With the AWS segment, Amazon serves “developers and enterprises of all sizes, including start-ups, government agencies, and academic institutions, through its AWS segment, which offers a broad set of global compute, storage, database, and other service offerings.”

The interesting part of Amazon AWS is that unlike its core business model (online store), this segment runs at high-profit margins.

For instance, by comparing the revenues and operating income growth over the years, you can appreciate how the cost structure for Amazon AWS gets better over time:

amazon-aws-business
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.

That makes it easy to understand why Amazon is doubling down on its AWS business segment!

As explained by Andy Jassy, when he was still Amazon AWS CEO, in a 2017 interview on Forbes:

If you look at what’s happening in the enterprise and the public sector over the last two to three years, it’s exponential and dramatic for AWS,” he says. “You can see it in really every imaginable vertical business segment. So it’s not like these enterprises are running just a couple applications. We have an $18 billion revenue run rate. You don’t have a business that big just on startups. We’re just at the beginning of mainstream enterprise mass migration to the cloud.

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

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