Amazon’s Current Empire

Unlike most of the Fortune 500, Amazon is very diverse. It isn’t one or two products that drive their success; it’s an army. Amazon’s business is made up of five primary divisions: Amazon.com, AWS, Alexa, Whole Foods Market, and Amazon Prime.

Each of Amazon’s five primary divisions would, on its own, be an impressive business. Combined, they create the world’s largest flywheel.

To better understand the behemoth, let’s look at and analyze each of Amazon’s divisions.

1. Amazon Marketplace: the #1 e-commerce marketplace

Amazon is the most monopolistic and well-positioned marketplace the Western world has ever seen. Last year they did $136B in revenue, with double-digit growth every year.

And every year, Amazon seems to be expanding its reach and market share. To date, Amazon has ten marketplaces across the globe, from the obvious—Europe and North America—to Japan, China, and India and are in the process of rolling out in Australia.

The e-commerce business is booming, powered by great logistics and third-party sellers. Amazon is quite literally becoming the de facto online store.

2017 estimates show a staggering 44% of US e-commerce occurred on Amazon.com.

And Amazon has been growing at least 13% YoY (year-over-year) for each of the last five years.

Source: BI Intelligence

And it gets better; the growth is diversified. In 2016, 35.5% of Amazon’s e-commerce revenue was international. That’s up from 34% in 2015.

All of this contributes to Amazon’s stock flying high.

But there is another layer to unpack: Amazon Basics. As an ex-Amazon seller, Amazon Basics is an ugly word. It boils down to Amazon analyzing third-party seller data and copying the best-performing products.

I have seen this happen to dozens of products and numerous friends. Amazon only cares about Amazon and serving customers. The dirty tactics they take with sellers are quite troubling and signal their future intentions. Ultimately, Amazon wants to replace all third-party sellers/products with Amazon Basics versions. Amazon wants to (and will) own the customer and every ounce of margin that comes with it.

This has implications both for buyers and sellers. For sellers, the issues are obvious. Yet Amazon is a bit like eating fast food, tasty in the short term and terrible in the long run. Brands cannot help but want access to their hundreds of millions of customers and thus sacrifice their future for short-term success. For buyers, the problem is equally bad.

Marketplaces die when the creator becomes the competitor.

As Amazon begins to limit options and over-promote their own products (which they already do in terms of which products get displayed), their pricing power increases. This could theoretically lead to increased (monopolistic) pricing and customer harm.

2. AWS: the #1 web services company

While the e-commerce business is incredibly powerful, AWS is arguably even better. (Note: I think Amazon should spin out AWS before regulators start anti-trust actions.)

Amazon built AWS for their marketplace. They needed the ability to host images and information for Amazon.com and, Bezos being Bezos, built the product in a modular fashion.

As AWS grew, Amazon constantly cut prices to crush competition, making AWS the easy choice.

“Your margin is my opportunity.” — Jeff Bezos

Today ~42% of the web is powered by AWS. That is more than double Microsoft, Google, and IBM (combined).

Yet given the easy-to-use system and affordable pricing, it makes sense.

And growth isn’t slowing down; quite the opposite. AWS accounts for 10% of Amazon’s overall revenue, with $4.6B in Q3 of 2017 (up 42% over last year) and $1.2B in profit (up 36% over last year).

Source: GeekWire

Amazon owns the infrastructure the majority of the internet is built on.

3. Alexa: the #1 voice assistant (hardware and software)

Amazon’s many-headed monster got a powerful new addition in 2014.

For those not reading between the lines, Amazon’s ambition is to own everything. Regardless of the nature of the product or purchase, Amazon eventually wants to offer it.

Alexa is the next iteration of this. Suddenly with the explosion of Alexa-powered devices, Amazon is sneaking a spy directly into your home.

This has nothing to do with Echo sales!

Hint: how do you buy things?

Alexa is designed to replace everything. The goal of the product is seamlessly purchasing everything. One-click checkout isn’t enough anymore.

“Hey Alexa, we’re out of toothpaste, toilet paper, and tampons.”

The beauty of Alexa (for Amazon) is selection. While customers who shop on Amazon.com currently have access to a wide variety of brands, ultimately Alexa defeats this. Eventually, every single product consumers ask Alexa for will be Amazon Basics (obviously the Alexa default). Once the trap of choice is removed (“I don’t care what brand of toilet paper”), customers are more inclined to buy, meaning any basic necessities will be provided by Amazon.

Source: Voicebot.ai

While the nifty voice controls are nice, this is Amazon’s true goal. And it is working wonderfully. According to Amazon, they sold 20M+ Echo units as of Q3 last year. I cannot even imagine how many more were sold for the holidays.

If only Amazon offered groceries …

4. Whole Foods: the tenth-largest grocer

Oh wait, Amazon bought Whole Foods in 2017 for about $13B. Now things get interesting. Here’s a complete breakdown on the implications of the Whole Foods acquisition.

To summarize, Amazon bought a fully functional, balanced network of supply and demand.

Amazon failed numerous times with groceries because of the challenge of spoilage. Food needs to move fast. The Whole Foods acquisition allows Amazon to leverage existing demand and largely decrease supply risk while offering edible options to online customers. Worst case scenario, some ham and cheese don’t sell online so they slash prices in stores to liquidate inventory.

And the Alexa connection makes this even more interesting. As consumers interact with their incredibly convenient Amazon device, why wouldn’t consumers grab groceries online?

“Hey Alexa, please order one gallon of milk, one loaf of bread, two tubs of yogurt, and a jar of peanut butter every single week. And my recipe calls for pizza crust, tomato sauce, and pepperoni; can you add those to my list as well?”

With Alexa Discovery, the implications go even further. Can you imagine a Pinterest-esque future where you have favorites, Amazon uses AI to suggest meals, you star your favorites, and Amazon automatically orders the ingredients?

There is a reason the top supermarket chains’ values dropped a combined $13B following news of the acquisition.

Source: MarketWatch

5. Amazon Prime: #2 video streaming service, #6 music streaming service

Amazon’s last main pillar is complicated. Prime is both a free two-day shipping service and streaming for content and entertainment.

This is the perfect flywheel connector. Studies show Prime customers spend nearly twice as much on average as non-members ($1300 vs $700; numbers vary based on source). That alone is huge. And at $7.99 per month, Amazon is making even more money.

With Prime Music and Prime Video (both free with Amazon Prime), the added value is even greater. Both services provide unlimited streaming access to Amazon’s entire catalog of licensed and original content, competing with services like Spotify and Netflix respectively.

Though both Prime services currently have less original content and smaller libraries than competitors, they are essentially free, keeping people in Amazon’s ecosystem.

If you can get free two-day shipping plus not need Netflix or Spotify, you are ticking a lot of boxes.

It is estimated that 63 million US homes have Amazon Prime (up 35% year-to-date). And ultimately, Amazon just wants to increase Prime subscribers. These boost recurring revenue ($1.9B in Q1 of 2017) while nearly doubling organic purchases, all of which fuel the fire.

Source: Statista

Amazon has five powerful business units, any of which would be a successful business in its own right.

But the story doesn’t stop there. Amazon also has compelling future growth opportunities.