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The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of SnoQap, any other agency, organization, employer or company. Assumptions made in the analysis are not necessarily reflective of the position of any entity other than the author(s). These views are subject to change and revision.

Addicted to Amazon

Addicted to Amazon

As consumers, we enjoy products and services that satisfy us. Whether you believe it or not, if there is a company that knows how to satisfy customers, it is Amazon. The company that started as an online bookstore in 1995 has grown and diversified its business portfolio to a wide range of operations.

The mastermind behind Amazon, Jeff Bezos, started his career on Wall Street. From 1986 to 1988, he worked for Fitel, a start-up that dealt with telecommunications networks for monetary transactions. Bezos then worked for D.E Shaw & Co from 1988 to 1993, and founded Amazon in 1995. Two years later, Amazon went public, growing from a market capitalization of $148 million to approximately $200 billion in less than 20 years. In 2018, Amazon reported record profits, earning $10.1 billion in net income compared to just $3 billion in 2017. However, Amazon had not generated any annual profit until 2016.

When many people think of Amazon, they mainly think of Amazon as an e-commerce store. Though they have dominated the e-commerce market, that is not the biggest moneymaker for the company. Amazon Web Services (AWS) has generated the majority of income since 2016. AWS is Amazon’s cloud computing division, comprised of a huge network of servers providing processing and storage solutions for companies, government agencies, and individuals. AWS continues to grow as a percentage of overall revenue, and it is a highly profitable business by Amazon standards, generating approximately 30% operating margins in 2018. AWS brought in $7.3 billion in operating income and $25.7 billion in revenue.

Furthermore, if there is one thing Bezos knows how to do well, it is spreading risk - Amazon surely shows how to implement this. In Economics, there is a concept called Economies of Scale. This concept shows how increased output lowers long-run average costs. A simple example of this can be illustrated how buying one water bottle can cost $3, but buying a case of 25 water bottles in bulk can cost $2.

Amazon is a scale company. In 1998, writing to shareholders, Bezos stated: “We believe scale is central to achieving the potential of our business model”. Apart from their e-commerce and AWS, some of the companies Amazon also owns include Twitch, Whole Food, Kindle, Echo, Alexa, Fire Tablets, Prime Music & Video, Pantry, Ring Doorbell, Zappos, IMDb, Fresh, GoodReads. A reason that many of us are addicted to Amazon is that Amazon has an obsession with satisfying consumers. Bezos stated, “There are two types of companies: those that work hard to charge customers more, and those that work hard to charge customers less”.  Amazon, presumably falls under the latter. This explains why many of us are obsessed with Amazon. Bezos best explains this by stating “One thing I love about customers is that they are divinely discontent. Their expectations are never static”. Due to this, Amazon is always striving to improve the customer experience – recently Amazon has started offering a 2-hour delivery option in certain areas. By focusing on customer satisfaction, Amazon creates customer loyalty, and regular users make a major contribution to the financial balance of the group. In 2015, Amazon had approximately 300 million customers. In an attempt to always satisfy customers, the company has established creative ways to make sure customers are satisfied, such as customer feedback and recommended purchases.

Despite this, some critics believe Amazon’s long-term strategic plan may cause problems in the future. By continually diversifying its range of product and services and establishing itself on all markets, the company puts small companies under pressure to constantly reduce their expenses. Further, Amazon has also been accused of dumping. This refers to a situation when a company sells exports very cheaply to another country, such as selling a product at a loss. And Amazon is very fond of this technique- in fact, Amazon sells its Kindle at a loss to gain market share and gain access to more consumers’ data. Data is important; Amazon has a significant amount of information on its customers. Just by the data Amazon has on customer trends, it knows what to advertise to people, and thus potentially sell them additional products.

Due to its strategies and dominance in various markets, Amazon is going to continue to obsess over customer satisfaction and strive to enter into new markets. According to RBC Capital Markets’ Mark Mahaney, Amazon’s next big move could be taking on the giants of the delivery industry. Amazon recently expanded its fleet to 50 planes and announced it will open a $1.5 billion air hub in Northern Kentucky in 2021. Currently, Amazon is handling up to 26% of its own shipping, meaning FedEx, UPS and the U.S. Postal Service are losing a portion of Amazon’s business.

Overall, everyone wants to be valued by someone, and Amazon knows how to show that they value us; therefore, our addiction to them may last a very long time.

Works cited:

Clifford, T. (2018). RBC’s Mark Mahaney: Amazon will compete directly with FedEx and UPS — ‘it’s just a matter of time’. Retrieved from https://www.cnbc.com/2018/11/08/amazon-will-soon-compete-directly-with-fedex-ups-rbcs-mark-mahaney.html

CNBC. (2019). How Amazon Makes Money. [Video file]. Retrieved from https://www.youtube.com/watch?v=3nGAQWyzY94&t=183s

CNBC. (2019). As Amazon Air Expands, FedEx And UPS May Suffer. [Video file]. Retrieved from https://www.youtube.com/watch?v=j2uZMa8e4S4

M’Barki, M & Neal, R (2016). Amazon and the rise of E-commerce. Published by Primento

Reagan, C. (2018). Amazon reveals a new plan to deliver more packages: Recruit people to run small-scale delivery services. Retrieved from https://www.cnbc.com/2018/06/27/amazon-is-recruiting-entrepreneurs-to-start-delivery-networks.html

PolyMatter. (2018). The Grand Theory of Amazon. [Video file]. Retrieved from https://www.youtube.com/watch?v=UyohSu-Ft_U

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