Three Ways Amazon Makes A Sh$t Ton Of Money!!

We can all agree that Amazon is one of the best companies out there is right?

It delivers a great value to consumers (e.g. free deliveries, generally affordable stuff, free returns, you can find almost everything there, in other words — convenience), while also delivering a great value to sellers (e.g. the ability to make money from home, fulfill their goods, in other words — convenience).

How does a bookstore become this e-commerce giant?

Created in 1994 by Jeff Bezos, Amazon has reported a revenue of $117.9 Billion. F*%$! How does a bookstore go from a couple hundred dollars to this crazy revenue in just over 20 years?

What is the secret sauce for Amazon’s success? Let me tell you: DATA!

It is not a simple coincidence that yesterday you were researching the price for a new 50-inch Smart TV, and today you get suggested a new TV stand, or maybe some speakers. If you are not an easy customer (one that often buys stuff), then they will send you some sweetener, like, perhaps ‘lightening discounts’.

This sounds still a bit inoffensive and not much different than any other (e-)company, right?

Let’s explore some of the (many) tactics Amazon uses to grow stronger, make a lot of money, and crush competitors (and people’s privacy).

Amazon reportedly closed 2017 with $30 billion in cash. With that much money, and without even considering other assets, and issuing debt bonds to finance acquisitions, Amazon can buy probably 90% of companies on earth.

I don’t think they want to become the new USSR or UASR (Union of Amazon Socialist Republic)… However, they acquired a certain amount of companies that (hardly) relate to their main business model: IMDB, Twitch, Audible, Songza, Zappos, Woot, Quidsi and Whole Foods. The list does not end here, but, I don’t wanna spend the next three hours listing all of their investments.

Why? It is rather simple… Amazon wants to dominate the e-commerce market. While Amazon.com in itself only reaches a certain demographic, IMDB reaches another, Whole Foods another, Twitch reaches the gaming community, and you can see where this is going…

Quick example before moving on: Why would Amazon buy Whole Foods (basically a brick and mortar retailer/supermarket)?

Amazon now has a great chance to, not only be the king of e-commerce but also to become the king of traditional commerce.

Buying Whole Foods gave Amazon access to:

465 physical spaces;

A different demographic that generally only shops in traditional retailers (e.g. older people);

The logistical opportunity to reach some geographies faster;

So much more data, on so much more people.

It makes sense, the more business it owns, the more access it has to different target groups, the more different data it collects, the more valuable it becomes.

Don’t you want to sell your company? YOU ARE F*$ed!

Take the example of Diapers.com:

Amazon tracks its competitors very closely. Therefore, when Diapers.com, a startup that allowed customers to easily set up recurring delivery of diapers and other essentials, started gaining traction with parents, Amazon did not like it. Jeff Bezos asked a senior VP to have a lunch with the founders of Diapers.com. In this lunch, the senior VP, told them that Amazon was about to enter the diapers business, and strongly ‘suggested’ that they sell Diapers.com to Amazon. They refused. Next thing they know Amazon had cut the prices of diapers by 30% and lost about $100 million in just about 3 months in an effort to drive Diapers.com business to the ground and force them to sell. This paid off… Diapers.com had lost a considerable amount of market share and could not sustain the business. Forcing them to sell. Amazon bided to buy the startup and Walmart presented a generous counterbid. Jeff was not playing around — When he learned about Walmart’s (his direct competitor) bid, he threatened to drive the price of diapers to $0 and annihilate diapers.com’s business. They had no choice but sell to Amazon.

P.S. — Out of curiosity try to go to diapers.com or relentless.com (yea, apparently Jeffy Jeff wanted to name Amazon, Amazon Relentless).

Amazon’s strong negotiating power, and leverage, forced into competitors has one and only goal: Creating a Monopoly where they will be able to later fix prices as they want with little to no competition.

2. Predatory Pricing

Predatory Pricing is one of the most infamous tactics Amazon uses to grow its revenue.

Due to the large amounts of data collected from its vendors, Amazon can study which products are more successful for which audiences and order them directly from the manufacturer, in order to offer lower prices and kill the competition.

Amazon’s Own Brand — Amazon Basics.

For example:

You set up a store selling iPhone Chargers. You buy them from a wholesaler for $5 and put it for sale on Amazon for $8. You have a profit of $3 per charger sold.

Amazon notices increased interest in your store and notices you have been making a killing selling these chargers. So they skip the wholesaler, go directly to the manufacturer, a Chinese Factory, and put up a mega order for hundreds of thousands of chargers. Due to the large order, and how big of a client Amazon is, the Chinese Factory agrees to sell the chargers for $1 per charger (or even less). Amazon sells them for $5 with free same-day delivery. And, just like that, you are out of the picture.

Accurate Representation Of Amazon Vendor Surveillance Practices

3. Amazon Web Services (AWS)

Despite what you have read in the last points, or even somewhere else, e-commerce is not the most profitable venture of Amazon. Amazon Web Services (AWS) is.

In fact, Amazon Web Services accounts for over 40% of Amazon’s revenue. Additionally, while Amazon’s E-Commerce branch(es) operate at a razor-thin profit margin of generally between 2 and 3%, Amazon Web Services has an operating profit margin of 25%.

So what exactly is AWS?

AWS is a cloud-computing service where companies can create scalable big data applications and secure them without the need for expensive and complex hardware infrastructure.

In itself, AWS consists of many cloud computing services. It provides servers, storage, networking, remote computing, e-mail, mobile development, cybersecurity, and many other (obscure) services.

In essence, AWS provides a complete infrastructure for any company to run their business online.

Popular companies using this service include Adobe, AirBnB, Netflix, Spotify, Instagram, and the list goes on and on…

But Hey… Fun Fact: All the companies I mentioned were hacked and customer’s data leaked. Adobe, AirBnB, Netflix, Spotify, and Instagram all suffered from hack scandals.

Due to the characteristics of its centralized storage practices, AWS, and many of the traditional related services are a sweet target for hackers!

So, why do these behemoth companies still use AWS?

It is not because it is cheap!

It is because it provides such a deep level of customer and market insights, together with an array of complementing features, such as a platform for mobile development and the study of in-app behaviours. It does not end here though, Amazon AWS has become a framework for companies where the business model heavily relies on the gathering and monetization of data.

Now you are asking: What do I care?

Since the tech boom, back in the late 90s, one commodity has risen to be one of the most important, needed, and cherished: data.

A century ago oil was the most important commodity. Because of oil, wars were fought, lives were lost (yes, I am hinting at Iraq — but not only). With data, we are seeing the same: Wars are being fought (yes, I am hinting at Edward Snowden, Julian Assange, etc.), and lives are being destroyed.

Amazon controls unprecedented amounts and types of data: how much money you spend, how you spend it, what are you browsing, how are you browsing, when are you browsing, in which platform are you browsing, what are your preferences, where you live, if you have kids, how many kids, if you have a girlfriend (how many girlfriends), and the list just goes on and on… If there was ever a concept of privacy, this is where it becomes meaningless.

However, unlike Google, Facebook, and other mediums that use data to sell to advertisers, Amazon is a one-stop-shop. They have the data, they study the data, they may sell the data, but above anything else, they use the data to sell their stuff back to you.

But why no one does anything about it?

Well:

- Advertisers need the data sold to them - Vendors need more customers - Politicians need more jobs for the country, and more donations for campaigns — if they try to regulate the industry with antitrust laws affecting Amazon, and others, political rivals may capitalise on this, and money can stop coming in. - Companies need its servers and the data, and insights they get from them.

Like the quote says: “With great power comes great responsibility”, and companies need to start being liable and accountable for how they use and protect people’s personal sensitive data. In Europe, GDPR came to help a little. However, it is not enough! Companies keep paying fines and get away with shady practices.

Your Privacy matters… Your data matters… And you should, somehow, be allowed to give consent on how your data is used, who has access to it and above anything else, be assured that in under any circumstances, your data is copied or leaked.

SO… Do you care about your privacy? What are your thoughts on trading your privacy for convenience?

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Jorge C.