Amazon: A Case Study in Complete Dominance
I’ve been enthralled with Amazon’s vision and dominance across so many businesses for some time. I think we’re watching the greatest business mind of this generation in Jeff Bezos. People have read Warren Buffet’s annual shareholder letter for decades to get a sense of where the business world was. Over the next decade, Jeff Bezos will fill that space.
His vision and confidence were on full display during Amazon’s May earning’s call when he told Amazon shareholders to take a seat.
“If you’re a share owner in Amazon, you may want to take a seat, because we’re not thinking small.”
And he is definitely not thinking small. Bezos announced that all $4 billion of the next quarter’s projected profit would be invested back into Covid-related issues, including ramping up testing for Amazon employees.
Bezos seems to be marching towards a virus-free supply chain, which is bonkers to think about. Amazon is about to set itself apart from every other supply chain on the planet as the most efficient, safe, and potentially important, supply chain. The vision is incredible, but it’s really no surprise from a man who has been lapping the competition for years.
We’re in the midst of one of the greatest displays of business dominance ever. No company has ever been firing on all cylinders in the way Amazon is. We’re talking about the world's fastest growing ecommerce company, the world's fastest growing cloud company, the world's fastest growing media company (yes, you read that right). And arguably the most effective back-end fulfillment system we’ve ever seen. The core service of UPS and FedEx (combined value of more than $90 billion).is now a feature of Amazon.
It’s incredible to think about what this company continues to achieve. They reported Q1 earnings a couple weeks ago, (May 1), and it was a spectacle. Here are some highlights:.
They did $75.5 billion in top line revenue, representing 26% YoY growth.
AWS topped $10 billion in quarterly revenue (ridiculous). .
Amazon’s Media Group reported 44% YoY growth for the quarter, with nearly $4 billion in revenue. (It should be noted that Amazon doesn’t specifically break out ad revenue, but it makes up almost all of the “other” revenue category (source).
Profits were down at $2.5 billion due to increased costs to meet the demand (but that didn’t stop Bezos from committing all upcoming profits to long term investments).
One way that helps put Amazon’s scale into perspective is to look at how much value they add or shed in a single trading day. Following the May 1 earnings call, shares were down 7% in after hours trading. That 7% is equivalent to ~$84 billion, or roughly the value of Boeing (or Goldman Sachs, or RBC, or the US auto industry).
Think about that: one earnings call and they can add or shed the value of one of the world’s largest commercial airline manufacturers - and not sweat it.
Let’s take a closer look at some of Amazon’s key growth areas and where they’re setting themselves apart from the rest of the business world.
Ecommerce
Amazon was one of the first to offer a comprehensive recurring revenue relationship with customers through Amazon Prime. This helped them move from being valued on a multiple of earnings to one on a multiple of top line revenue.
Today, Amazon Prime has more than 103 million members in the US alone. At $119 a year, that represents more than $12 billion in annual revenue just on the subscription cost of Prime. Prime also boasts an incredible 91% retention rate.
That doesn’t consider how much more those 103 million people spend on Amazon each year than non-Prime members.
Ecommerce has always been the core of Amazon’s business, and creating Prime is another example of incredible vision from the company. Recurring revenue relationships are what all businesses want with customers, and only recently are some of the larger consumer organizations attempting to create these recurring revenue bundles.
I’ve been a Prime member for nearly 5 years and I can’t imagine ever not having it. That’s the type of relationship you want to build with customers if you’re going to create hundreds of billions - or in Amazon’s case trillions - of dollars in shareholder value.
Amazon Media Group
Amazon has turned advertising revenue into a multi-billion dollar business. This quarter alone they did nearly $4 billion dollars in ad revenue.
While still a ways behind Facebook and Google, this makes Amazon one of the largest and fastest growing media companies in the world. And compared to Facebook’s 98%, or Google’s 70%, Amazon’s ad revenue is only about 4% of Amazon’s revenue.
It’s weird to think about Amazon as a media company, but when you go a little deeper it makes perfect sense. For CPG (consumer packaged goods), they’re able to offer advertising that is of the highest intent. They can sell ad spots to Bose to show to shoppers with Sennheiser headphones in their cart.
I expect Amazon Media Group to continue to grow fast. The demand for Amazon’s ecommerce may retract a bit when things are back to normal (i.e we can leave our house again), but I don’t think they go back down to pre-COVID levels.
More shoppers = more ad dollars.
Amazon Web Services
AWS alone might be one of the ten most valuable companies in the world as a standalone company. They did $34.7 billion dollars in sales in 2019, and are growing at 33% YoY.
They are undoubtedly the preeminent player in cloud computing, owning more than 34% of the market. They had a much longer head start on Azure than expected, and they’re run by one of the tech world’s best executives, Andy Jassy.
This shift towards distributed work is likely to continue as the norm rather than the exception, There is no reason to think AWS isn’t positioned to reap the benefits of that trend.
Is this all a good thing?
As someone who is fascinated by business, it’s quite something to watch. The strategic moves Bezos and Amazon continue to make are remarkable. But the size and dominance are cause for concern. When one company controls so much share of so many markets, it quickly becomes too big to fail and overruns governments.
I don’t have intimate enough knowledge about how the FTC works in the US to guess how it might play out, but there is a strong case to break up Amazon (ecommerce, AWS, fulfillment, maybe).
Not only would it breed more competition and life in the market, but historically breaking up companies has been a good thing for shareholders. The parts are usually worth more than the sum of the whole. I don’t see why Amazon would be any different.