Why is Amazon so big
Taxing everything
The above chart gives a brief overview about Amazon’s business and we have seen a steady growth in past years and Amazon becomes one of the most valuable company in the world. So what are the reasons behind? Simply put, 2 key traits creat the success of Amazon:
1) Flywheel effect
2) Operate as an “API-company”
Flywheel effect
1) Prime: Premium member service, includes entertainment videos, music, books and free shipping
increase customer loyalty, Amazon prime members have a much higher purchase frequency and purchase amount than non-members
2) Marketplace: Third party seller platform, enables other retailers to sell products on Amazon's platform
Allowing third-party merchants to sell products greatly increases product diversity that customers can choose from. When customers have more choices, Prime membership becomes more valuable and attracts more customers to buy Prime service
More third party merchants will come to Amazon because of increasing customers amount
When Amazon has a big user base and sales are increasing, it has a stronger bargaining power over upstream suppliers which make products more affordable to customers and incentivize Prime service purchase
Amazon marketplace provides merchants with FBA (fullfillment by Amazon) service, which helps merchants to deliver products by leveraging its own logistics infrastructure. The unit cost of logistics also decreases because of the economy of scale
3) AWS: Cloud service providing users with high on-demand hardware and network resources.
Merchants, small and medium businesses could choose to deploy their business fully on AWS without worrying about complexity and chores building all infra on their own
AWS also becomes cheaper when more and more users come to the platform because of the economy of scale
The "API company"
The "API company" can output the existing internal capability to external companies. For Amazon:
1） FBA (fullfillment by Amazon) service: Building an internal logistics system is a necessary task for large e-commerce companies. However, Amazon has taken it to another level by not only using the system for its own services, but also standardizing, modularizing, and servicing the entire system to external customers. Even in the United States, small companies that have not entered the Amazon platform can purchase Amazon's FBA logistics services at a relatively low cost to accomplish their own goals.
2）AWS: Around 2003, Amazon's early internal systems were struggling to support the company's growth. At the time, Amazon's IT team strictly controlled the company's server resources in order to maintain a good user experience. This meant that any internal team that wanted to do something new had to apply for resources from the technology team. As a result, the company's operations were very slow, and many project managers were complaining about being constrained. To solve this problem, Jeff Bezos and the senior technology team started developing the prototype of the AWS cloud service platform. In the middle of the development process, they suddenly realized that creating a separate system like this was not easy, and that this type of service was not only needed by Amazon, but also by many other companies.
This approach of turning internal functionality into external services has three major benefits:
1) Easy bootstrapping. It allows internal teams to try out new businesses with minimal cost, even like a startup team taking small steps quickly and iterating rapidly. Because the business already has its first core customer---Amazon itself, it solves a big problem that startups typically face.
2) Accelerate iteration. By exposing these functional services externally, they are exposed to market competition, which often generates new vitality. When a service is externalized and commercialized, it faces real competition and must truly understand user needs, improve its product, and continuously consider its own survival, eventually becoming a successful enterprise like AWS, with annual revenues of tens of billions of dollars.
3) Strengthen its "flywheel effect". The more external commercial businesses Amazon launches, the more businesses use Amazon's services, and the more dependent they become on Amazon's platform. The services delivered through these interfaces can help businesses grow healthily, but once they leave, their business will be greatly affected.
We can find several key points and templates in this entire business logic:
1) The initial investment and fixed costs for the [X] are very high, such as buying servers, maintaining a large number of engineers, and so on
2) From the beginning of its existence, the [X] platform had the first large customer, which is Amazon's own e-commerce business. This customer allows the [X] to not only deeply understand the needs, but also constantly iterate its technology and services
3) [X] greatly benefits from economies of scale. That is, the more people use it, the lower these initial and fixed costs are spread out. Therefore, by opening up [X] to the outside world, [X] can become even cheaper. It is also more difficult for others to compete with it.
The [X] could be AWS or FBA service and they actually follow the same logic.