Amazon: From Books to Everything

1 minutes reading time
Published 17 Jun 2024
Reviewed by: Kasper Karlsson

Founded by Jeff Bezos in 1994, Amazon began as an online bookstore and has since evolved into one of the world's largest and most influential technology companies. Its growth and diversification have transformed it into a global conglomerate that not only dominates e-commerce but also logistics, cloud computing, and digital advertising. This article dives into Amazon's remarkable transformation, highlighting the milestones and strategic decisions that propelled it from an online bookstore to a global tech powerhouse, forever changing the landscape of commerce and technology.

Key Insights

  • Amazon's remarkable development: Amazon began as an online bookstore in 1994 and has today evolved into one of the largest and most influential companies globally.

  • Milestones and innovations: Key milestones in Amazon's growth include its 1997 IPO, the launch of Amazon Marketplace in 1999, and the introduction of Amazon Prime in 2005.

  • Amazon Web Services (AWS): AWS has become a cornerstone of Amazon's business, achieving a $100 billion revenue run rate by Q1 2024, arguably making it the most valuable entity within the company.

  • Advertising – the hidden gem: Amazon's advertising segment has grown rapidly, generating $47 billion in 2023 and emerging as a major competitor to Google and Meta.

The Early Years

Jeff Bezos launched Amazon in July 1994 after quitting his job at D.E. Shaw, a quant-driven hedge fund on Wall Street. Initially named "Cadabra," the company was quickly rebranded to Amazon, inspired by the world's largest river. Bezos's vision was to create the world's most customer-centric company, starting with an extensive selection of books available online. The idea was simple but revolutionary for its time: offering a wide variety of books through an online platform, making it easier for customers to find and purchase what they wanted.

The company's first major milestone came in 1995 when went live, selling its first book: Douglas Hofstadter's Fluid Concepts and Creative Analogies: Computer Models of the Fundamental Mechanisms of Thought. The launch was a major success, and within its first month, Amazon had sold books to people in all 50 U.S. states and 45 different countries.

Amazon's 1997 IPO was another pivotal moment, raising $54 million and signaling the beginning of its rapid expansion. The IPO provided the necessary capital to expand beyond books. By the late 1990s, Amazon had broadened its product range to include music, DVDs, electronics, toys, and more. This diversification was a strategic move to transform Amazon into a one-stop online shopping destination. Bezos' approach to growth was unconventional; he reinvested profits back into the company to fuel expansion, rather than focusing on short-term profitability. This strategy laid the foundation for Amazon's customer-centric philosophy, emphasizing convenience, selection, and price.

"The most important single thing is to focus obsessively on the customer. Our goal is to be earth's most customer-centric company."

– Jeff Bezos

Amazon's early success in the book market was due not only to its extensive selection but also to its focus on customer experience. Features like customer reviews, personalized recommendations, and easy navigation helped Amazon stand out in the burgeoning e-commerce market.

In 1999, Amazon made a bold move by launching Amazon Marketplace, which allowed third-party sellers to offer products alongside Amazon's own inventory. This decision to open the platform to other retailers was initially met with skepticism, but it proved to be a masterstroke. It expanded the product selection available to customers and helped Amazon grow its revenue without holding additional inventory.

Further reading: Jeff Bezos: Building an Empire from A to Z

E-Commerce Dominance

Since its inception, Amazon's core business has revolved around e-commerce. This segment is split into two parts: its own direct-to-consumer (D2C) segment called Online Stores and its Third-party Sellers operations, where other companies are invited to sell their products on Amazon's platform.

Initially, Amazon focused exclusively on D2C sales. However, in 2000, they made the seemingly counterintuitive decision to welcome third-party sellers onto their platform, effectively allowing external companies to compete with them on their own turf. This strategy has proven immensely successful, with third-party sellers now accounting for the majority of sales on Yet, about 60% of Amazon's e-commerce revenue still comes from its Online Stores, as only a percentage (take rate) of the third-party sellers' revenue reaches Amazon's topline. In the full year 2023, Amazon's e-commerce revenue was $372 billion – more than the GDP of several countries. Here is Amazon's revenue breakdown for Q1 2024:

Amazon Revenue Breakdown revenue breakdown for Q1 2024 (LTM)

Amazon's early success in the book market paved the way for its expansion into other product categories. By the early 2000s, Amazon had diversified into electronics, apparel, and various consumer goods, making it a one-stop shop for virtually everything. Key to this growth was the introduction of Amazon Prime in 2005, a subscription service offering free two-day shipping, which significantly boosted customer loyalty and retention.

Amazon Prime: A Bold Gamble That Paid Off

At the heart of Amazon lies Amazon Prime, one of the most popular subscription services globally with over 230 million members. Not only does it offer free shipping on all items found on Amazon, but it also provides services for streaming music, movies, and TV. Additionally, members benefit from cloud storage, access to the Amazon Fresh food delivery service, and exclusive discounts at the Whole Foods grocery chain.

"We want Prime to be such a good value, you'd be irresponsible not to be a member."

– Jeff Bezos

In the early 2000s, Amazon was already a significant player in e-commerce, known for its vast product selection and competitive prices. However, the company faced stiff competition from other online retailers. Bezos recognized the need to enhance customer loyalty and satisfaction to differentiate Amazon from its competitors. The idea of Amazon Prime emerged as a response to these challenges. Rather than focusing solely on price or product range, Bezos envisioned a service that would offer unparalleled convenience and value to customers. The concept was simple yet revolutionary: for an annual fee, members would receive unlimited two-day shipping on eligible items. This proposition was designed to reduce the friction of online shopping and encourage more frequent purchases.

A fascinating detail about the launch of Amazon Prime is that the decision was driven more by intuition and customer-centric thinking than by detailed financial analysis. Bezos believed that the convenience of fast, free shipping would create a strong value proposition for customers, despite the high initial costs and uncertain financial benefits.

This intuition was rooted in a deep understanding of customer behavior. Bezos hypothesized that customers' aversion to shipping fees was a significant barrier to online shopping. By eliminating this barrier, they aimed to increase purchase frequency and customer retention, leading to higher long-term revenue. Reportedly, several members of Amazon's senior management team were against this decision, and the math didn't support it, but Bezos made it happen anyway, relying solely on intuition.

According to a 2018 report from Business Insider, the average Amazon customer in the U.S. spends about $600 annually. In comparison, an Amazon Prime member shells out an average of $1,400 each year. This significant difference likely justifies the affordability of Amazon Prime; the company does profit, just indirectly. Over a decade, the spending of an average Prime member on Amazon increases tenfold.

Another fascinating aspect to consider is the psychological dimension of the purchasing process. Given that consumers trust Amazon and have a recurring cost associated with it, they are incentivized to make Amazon their primary online shopping destination whenever they need something.

"We get to monetize in a very unusual way. When we win a Golden Globe, it helps us sell more shoes. And it does that in a very direct way. Because if you look at Prime members, they buy more on Amazon than non-Prime members, and one of the reasons they do that is once they pay their annual fee, they're looking around to see, 'How can I get more value out of the program?' And so they look across more categories – they shop more. A lot of their behaviors change in ways that are very attractive to us as a business. And the customers utilize more of our services."

– Jeff Bezos

Amazon Web Services (AWS)

AWS, Amazon's counterpart to Microsoft Azure and Google Cloud, operates within the infrastructure as a service (IaaS) domain. By Q1 2024, AWS reported revenues of approximately $25 billion with 17% year-over-year growth, establishing it as the uncontested global leader in this space – a figure roughly three times higher than that of Google Cloud.

The rise of AWS has been nothing short of remarkable. By Q1 2024, it reached a $100 billion revenue run rate, with an operating margin of 30%, arguably making AWS the most valuable entity of Amazon. Here's AWS's revenue per quarter since 2014:

Revenue growth, quarter over quarter, 2014-2023: Amazon Web Services
AWS's revenue per quarter since 2014

A popular narrative exists that Amazon came up with the idea for AWS by considering the sale of surplus data processing capacity left over after the heightened demand of peak trading days like Christmas Eve, Black Friday, and Cyber Monday. This peak demand would naturally result in excess capacity during quieter periods. However, many Amazon insiders challenge the authenticity of this story.

The rise of AWS raises some obvious questions. How did an e-commerce company diversify into such a distinct and different domain? It's hardly a coincidence. Innovations like AWS, Alexa, and Amazon Prime have all emerged from the trained minds of Amazon employees, underlining a company culture deeply rooted in innovation and visionary thinking, largely shaped by Jeff Bezos himself.

Andy Jassy, who succeeded Jeff Bezos as Amazon CEO in 2021, was the leading force behind AWS, serving as its CEO for 24 years before assuming leadership of the entire company. Appointing Jassy as CEO likely indicates Amazon's vision for the future, emphasizing cloud computing as their core business over e-commerce.

Prominent names like Spotify, Netflix, Twitter/X, Disney, Meta, Baidu, and Adobe are just a few of the many customers that rely on AWS. Notably, significant sectors of the U.S. government, including entities like NASA and the CIA, are customers of AWS as well.

Amazon's Advertising Goldmine

Amazon's advertising segment has experienced impressive growth since its 2012 launch, and is emerging as a highly profitable division within the company. In 2023, Amazon's ad services generated $47 billion in revenue, marking a 27% increase from 2022. This growth trajectory is expected to continue, bolstered by new initiatives such as more ads in Prime Video and partnerships with companies like Meta and Snap to enhance ad performance​.

Amazon's rapid growth in the digital advertising sector marks a significant industry shift, representing the first major threat to Google and Meta in the past decade. This shift is largely due to Amazon's commanding presence in the U.S. e-commerce market, controlling roughly 40% as of 2024, providing Amazon with vast amounts of consumer data and a unique position to sell ads within its own e-commerce ecosystem.

Further reading: The Rise of Google, Meta, Amazon, and Youtube in Advertising

The platform's extensive customer base and detailed data on shopping habits have provided Amazon with a foundation to build an advertising business that offers unparalleled insights into consumer intent and preferences. Unlike other digital advertising platforms that infer user interests based on browsing history or social media activity, Amazon's insights are based on actual purchase data, giving advertisers a direct line to consumers who are in the buying mindset.

The company has capitalized on this advantage by developing a range of advertising products that allow businesses to place their products in front of consumers at critical moments in the shopping journey. From sponsored product listings that appear in search results to display and video ads across Amazon's websites and devices, Amazon has created a comprehensive advertising ecosystem that integrates seamlessly with its e-commerce operations.

Also, the physical aspects of e-commerce serve as a protective barrier against potential threats. This is because entering the e-commerce market requires establishing a comprehensive logistics network, distribution centers, and, for B2C operations, production capabilities. These requirements demand significant time and financial resources.

Amazon's operations, which are largely digitally scalable such as the advertising arm, are thus protected by an extensive physical network that is challenging, if not impossible, to replicate. This combination of high CAPEX needs and significant network effects creates a formidable barrier to entry. When tangible assets are integrated with the right digital services, such as a leading e-commerce platform coupled with advertising services, the business model becomes exceptionally robust.

With this in mind, one can almost view Amazon's advertising segment as a monopoly on its own platform. This is a major reason analysts believe that Amazon's advertising arm has an EBIT margin of more than 50%. Remarkably, if this is true, the advertising segment generates roughly the same EBIT as AWS from this point forward, and it also grows faster.

Comparing the growth rates and scale of Google's, Meta's, Youtube's and Amazon's advertising revenue
Advertising revenue of Google, Meta, Amazon, and YouTube visualized

The Whole Foods Acquisition

It's widely recognized that companies with a substantial physical footprint are increasingly embracing digital transformation. However, the inverse – digital-first companies going into the physical realm – is rarer and offers a more intriguing analysis. Consider the 2017 acquisition of Whole Foods: Amazon, an internet-born giant, acquired Whole Foods for $13.7 billion. Whole Foods, which holds approximately 2.5% of the massive $800 billion U.S. food market, stands as an unconventional choice for a rapidly growing digital company. This move into a relatively stagnant market, coupled with the acquisition of significant real estate (even if many of Whole Foods' locations are leased), is indeed noteworthy.

One compelling reason for Amazon's acquisition is its strategy to continually enhance the Prime offering. Amazon recognizes that these additions are likely to create value for a broad spectrum of consumers, making it a topic worth discussing. Bezos' thought-provoking words further illuminate this perspective:

"I very frequently get the question: 'What's going to change in the next 10 years?' And that is a very interesting question; it's a very common one. I almost never get the question: 'What's not going to change in the next 10 years?' And I submit to you that that second question is actually the more important of the two – because you can build a business strategy around the things that are stable in time."

In essence, Amazon not only leads the world in research and development spending but also invests heavily in what they believe to be timeless assets and trends. How do you compete against such a company?

Listing the biggest spenders at research and development as of May, 2024
Top 10 R&D spenders 2024

One of the most significant expenses and challenges for online retailers is the cost of deliveries. Amazon's increased physical presence, such as through Whole Foods, might be a strategic response to this challenge. For instance, Whole Foods could serve as Click & Collect centers, allowing customers to enjoy reduced prices while Amazon simultaneously cuts logistics costs. Moreover, this expanded physical network could facilitate easier product returns, resulting in additional cost savings. The most obvious opportunity for Amazon with Whole Foods is likely leveraging its enormous and efficient logistics network to venture into food delivery. Since the acquisition in 2017, it seems that not much has happened yet – so time will tell.

Amazon has long been committed to pioneering drone deliveries. It's conceivable that Whole Foods locations could also be leveraged as "drone hubs," strategically reducing delivery distances. However, before this vision becomes a reality, there's a need to revisit drone legislation. Numerous challenges, including privacy concerns from onboard cameras, potential threats to public safety, and other societal considerations, must first be addressed.

The primary motivation behind Amazon's acquisition of Whole Foods seems to be its strategy to bolster Prime, fortifying its competitive advantage and broadening its ecosystem. However, there might be a deeper rationale to this deal. Time will tell as its true success will become more evident in the future. Currently, Amazon grapples with significant expenditures, notably salaries and delivery costs. Yet, its relentless refinement of the logistics chain, coupled with increasing automation, suggests a promising trajectory towards substantial margin enhancements in the future – whereas Whole Foods potentially could play a large role in.

Further reading: Amazon's Most Notable Acquisitions Since Inception

Concluding Thoughts

Throughout its history, Amazon has often been criticized for not making short-term profits, a challenge Jeff Bezos has addressed for decades. Yet, this narrative persists, even as Bezos and Amazon consistently demonstrate the long-term value of strategic investments aimed at solidifying their competitive edge.

However, it's crucial to recognize that present lower cash flows, a byproduct of aggressive investment, often leads to increased cash flows in the future if the capital is intelligently deployed. For example, Amazon spent $85 billion on research and development during the past year, more than Microsoft and Apple combined.

To truly grasp Amazon's ethos, one must read Bezos' first shareholder letter. Rather than detailing the business model, this letter focuses on Amazon's strategic intent, encapsulating a vision of longevity that underscores market expansion and relentless customer focus over short-lived earnings. This foresight has been instrumental in propelling Amazon from its humble beginnings as a bookseller to its current stature as one of the world's most valuable companies by market capitalization in just 30 years.

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