In the year 1994, Jeff Bezos left his cushy investment banking job, to work on his startup. Internet was blowing up at the time. So he got the idea of doing something internet-related. Of creating an online store, to sell books! What should he call this online store? He thinks of the name Cadabra. From Abra-Cadabra. This name was so weird that when he started using this name, his lawyers questioned the name. When they called up customers, the customers often didn’t recognise or understand the name of the company. They tell him that the name has to be changed. So Jeff Bezos started thinking about other names. He registered several domain names. Because it was supposed to be an online bookstore, he thought of BookMall. In fact, this is a domain name that still redirects to amazon.com when you type in this website on your browser. He finally settled on the name Amazon, because Amazon is the largest rainforest in the world. And the Amazon River is the largest river in the world. He wanted the Amazon company he built, to be the largest bookstore in the world. Interestingly, if we fast forward to 25 years into the future, today, Amazon is not only the largest bookstore in the world, but also is the largest online store for buying just about anything. And Amazon Prime video, is one of the largest OTT platforms. Amazon Web Services is number 1 in its field. Amazon Alexa, Amazon Kindle, Amazon Drive, Amazon Music, Amazon’s Audible, Amazon Pay, Amazon has even started delivering groceries in some countries, under the name Amazon Fresh. At one point, Amazon had tried to launch their phone, called Amazon Fire. Though that turned out to be a flop idea. But today, Amazon has become so successful not only as an online store, rather as a company spread over soo many sectors. How was it possible? What is the Business Model of Amazon? “Jeff Bezos has become the first human being on the planet to be worth $200 billion.” “I was a good student. I always worked really hard. I was nerdy. It doesn’t matter to me whether we’re a pure internet play what matter’s to me is do we provide the best customer service?” The idea of Amazon was quite simple right from the start. But it was a unique idea for its time. To create an online bookstore. At the time, people had to go to physical bookstores to buy books. Why not let people buy books online through a website on the internet? Initially, Amazon’s website was a mere bookselling website. The advantage of selling books online was that customers could access thousands of books on a single website. A very basic, practical, and convenient idea. One that people needed. Right from the beginning, even as a startup, Amazon was a successful company. The website was launched in 1995. And by December 1996, they had amassed a customer base of 180,000. Their website looked like this then. By 1997, their revenue had reached $148 million. At this point in time, Jeff decided that he didn’t want Amazon to remain a private company instead, he wanted to list it as a public company in the stock market. So that the company could access more funds to grow. In 1997, Amazon became a public company. And by 1998, Amazon’s revenue had reached $600 million. There are said to be 2 main reasons behind Amazon’s success.
First, Amazon was offering a huge convenience to the customers. And at the time, there were next to no companies that was offering the same service as a competitor. And the second is something that’s called the Flywheel Effect. A flywheel is basically a spinning wheel, it keeps spinning evenly even when faced with changes in external conditions. Amazon’s business model had become like a flywheel by then. They sold books at lower prices, and millions of books were available in their online store, so the customers had a positive experience, since the customers were happy, it drew more customers to their website, and because more customers were joining their website, the sellers of the books, especially the third-party commission-based sellers, wanted to join Amazon to sell their books. Because they could see the large number of customers it had. So more and more sellers listed their books on Amazon, leading to more options of books to buy on Amazon for the customers. It had become a wheel that was being pushed in the same direction twice, increasing the rotational speed. When Amazon earned more profits, Amazon used that money to improve their website and to improve the customer experience as well as in keeping the costs low. Because this was a game of low costs. When books were being sold at low prices, more customers and sellers would use their services. And thus a nice business model was created. In 1998, Bezos thought of using the same strategy to sell not only books, but to sell computer games and music also. In 1998, Amazon expanded their business, in addition to books, they were also selling computer games and music on their website. It saw unprecedented success. To such an extent that in 1999, Time magazine’s Person of the Year was Jeff Bezos. His photo was printed on the front page. With time, Amazon adopted many ideas, big and small. Driving forward the growth of the company. One of these ideas was, the 1-Click button. When you shop on Amazon, you would’ve seen, there’s an option “Add to Cart” and below it, there’s the option Buy Now with 1-Click. With one button, you can buy the products and get them delivered. Many people use this 1-Click button and often end up buying things that they truly don’t need. This button was a great idea on its own. And it was so successful that in September 1999, Bezos got this technology patented. There were 2 uses of this seemingly simple button. The first and quite obvious is that customers can buy things much more easily. It greatly improves the convenience of the customers. And the second and hidden benefit of this was that when people use this button, they need to save all their information first. Their personal information. Name, contact details, payment details, billing address. Only then can you use this button. Amazon started tracking it. When people used this button, Amazon tracked what they bought. And based on that, Amazon started sending out suggestions “If this person bought this, they would like this too.” With this, they started putting up ads for the customers according to their buying preferences. With the help of these targetted ads, it became easier for Amazon to sell products. And their sales grew exponentially. If you have to click on multiple buttons to buy something, it gives you the time to think. Do I really need it? Should I buy it? But if one click of a button, you get to buy something, you wouldn’t even get the time to think. So the sales of Amazon grew even more. Several companies tried to copy this idea. There’s a company called Barnes & Noble, they tried to incorporate a one-click button too, but since Amazon held the patent, they lost the lawsuit. And Amazon was the only one that could use this. Amazon had a huge advantage because of this. But fortunately, for the other companies, this patent expired in 2017. And presently, any company can use it. For starting any type of a business or job, you need creativity and innovation but before that you need to have the basic skills in your field. How Jeff Bezos had the knowledge of computer science beforehand. It was his field of study. While working at the investment bank, he had an idea of the potential of the internet. In his job, he was assessing the growth of the internet, and whether they should be investing in internet-based companies or not. Similarly, if you want to be successful in any field, you would need to have the basic skills. And for learning skills, other than formal education and training, In 2000, the Amazon Marketplace was launched. Jeff didn’t want to be limited to books and games. He wanted everything to be sold on Amazon. Through this Marketplace, any third-party vendor could sell anything on Amazon. The benefit was that Amazon would take a portion of the sales as its cut, of anything sold. And this was huge. Because normally, if Amazon had to sell something suppose, Amazon wanted to sell tables and chairs. Amazon would have to have a warehouse for making and storing the tables and chairs. But here, a third party was making the tables and chairs and was selling through Amazon. So Amazon didn’t need any storage space. It didn’t need to build its warehouse. This became an important source of revenue for the company. Amazon was growing so fast with so many new customers and vendors joining them, that they faced a shortage of data storage. Jeff then decided to invest more in technology and to create their own data storage facility. Rather than using someone else’s storage facilities. Friends, this was the birth of AWS. Amazon Web Services. Again, this was another field, that didn’t have much competition. Not many companies were doing this. And this business was so successful for Amazon, that currently, this is the highest profitable business that Amazon is involved in. 40% of the profitability of Amazon is from AWS. Amazon Web Services. Most of the top companies in the world who have an online presence, Netflix, Pinterest, Twitch, LinkedIn, Facebook, use Amazon Web Services to store their data. In 2007, Jeff Bezos executed another horizontal expansion of Amazon, with the launch of Kindle. An e-Reader. Since Amazon had begun as an online bookstore, launching an e-Reader, so that books could now be read digitally as well as physically, was a related expansion. Interestingly, Jeff Bezos decided that Kindle would be a Zero-Profit device. The cost incurred in making the device, would be the only amount recovered from the buyers and Amazon would earn zero profit from selling Kindle. You would be surprised to know this, you might wonder how it could be possible. The simple reason for this was the books that could be read on Kindle had to be bought on Amazon’s bookstore. Though Amazon wouldn’t earn anything from Kindle, Amazon would make money by selling the books. This business strategy was very successful too. With this Kindle could become a very low-cost device. Many people started buying it, and today, Kindle is the world’s number 1 e-Book reader. Friends, you might have noticed one thing, so far in the story, the areas that Amazon was successful in, in most of the areas, Amazon was the first company, to properly get into the business. To capture the market. There was a significant First Mover Advantage that Amazon exploited time and again. For example, it was the first to come up with the idea of an online bookstore. To become successful with the first-mover advantage becomes very easy. Although, one has to work really hard to maintain it later on. Like how Amazon had patented the new technologies and kept innovating rapidly, so that Amazon could maintain that advantage. And it could defeat the competitors that cropped up later. In the areas that Amazon could not get the first-mover advantage, where there was a tough competition already, Amazon’s failures were highlighted there. Such as Amazon’s Fire phone. When Amazon tried to launch its smartphone, in 2014. But 2014 was already quite late to launch a smartphone. The first iPhone was launched in 2007. And Android was launched a few years later. By 2014, there was tough competition between Apple and Android. Both companies were innovating continuously and bringing in new technologies. In this case, when Amazon came up with its smartphone, it was very difficult for Amazon to compete with the experienced players. That’s why Amazon’s Fire phone was a huge failure. But on the other hand, for e-Readers, Amazon was one of the first companies to make e-Readers. They made a good quality product at a low cost and with zero profits, so Amazon is the Number 1 for e-Readers. A similar thing was seen in the Indian market. In Amazon’s business field, Flipkart was launched in 2007. Amazon hadn’t entered the Indian market in 2007. Flipkart got the first-mover advantage here. And this advantage remained for years. In 2013, Amazon entered India with Amazon India. But because of Flipkart’s advantage, even now, Flipkart is giving strong competition to Amazon. The two companies have an almost Duopoly in the eCommerce market. A monopoly is when one company rules the market, A duopoly is when two companies rule. Each of the two companies has a market share of around 30%, and all the other companies share the remaining part. If we look at the data from Financial Year 2020, the number of users of Flipkart is more than three times of that of Amazon India. And the revenue earned by Flipkart is more than thrice of that of Amazon India. The simple reason behind this is that Amazon is spending a lot of money in the Indian market so that it could increase its market share. So it is willing to work at a low profit too. It is sacrificing a part of its profit to build a better market share. Because as we can see, the company that can get the biggest share of the market, gets this Flywheel advantage. There’d be more customers and more sellers. So it is very important to do this. To be successful in this market. So even if one doesn’t earn as much profit in the beginning it’s alright. When Flipkart got its advantage they made full use of it by quickly diversifying. Presently, Myntra is owned by Flipkart, Flipkart Wholesale, Flipkart Health+, Cleatrip, Shopsy, and even the payment app PhonePe. Flipkart has a majority stake in it. Similar to the horizontal expansion of Amazon in the USA and other countries, of its business areas, Flipkart did the same thing in India. But overall, the growth of Amazon, has still been exponential across the world. You can see it on this chart, their revenue growth in the last 20 years. From 2005 to 2021, they have crossed a quarterly revenue of $100 billion and this chart is rising exponentially. Due to the coronavirus pandemic, it increased further, because everything was closed during the lockdown, so everyone was ordering goods on Amazon, while other shops were closed. Amazon got a huge advantage from it. Due to this, Jeff Bezos became the richest man in the world. Amazon’s eCommerce business can be divided into 2 models. 1P and 3P. 1P means that Amazon buys a product stores it in its warehouse, puts it up on its website and then delivers the product to the consumers. The second is the 3P model. it means that someone else makes the product, and sells their product on Amazon, while Amazon acts as a marketplace, and then the product is delivered to the consumers. In the 3P model, Amazon basically acts as a platform, that is used by the sellers and the consumers to sell or buy their goods. Interestingly, there isn’t a significant profit margin in the 1P model. Most of the profits come from the 3P model, because in 1P the goods need to be stored as well. It is filled with hassles like buying large warehouses, for storing the goods, and the duration of storage, a lot of money goes into these. In the 3P model, there’s just the website, on which people can come to sell and buy products. For Amazon, the benefit lies when the 3P model is used more. Initially, Amazon had used the 1P model, when it began in the late 1990s. In this chart, you can see, the proportion of usage of 1P versus 3P. With time, the percentage of 3P kept increasing. By 2018, 58% of things that were being sold on Amazon, were sold under this 3P model. Meaning that Amazon wasn’t going into the hassles anymore. And was earning more profit. The revenue sources of Amazon and the money it earns from its various businesses can be seen in this chart. If you look at the numbers from 2020, the online store contributes the most revenue, around $200 billion. And AWS is a major source of revenue for Amazon, because it is the most profitable. This chart shows you the revenue only the money that the company earns. But doesn’t show the amount spent by the company. For that, we turn to the chart of profitability. Interestingly, Amazon, as a company, wasn’t very profitable in its first decade. Until 2014, the company was earning next to no profits. Because all the revenue of the company, was invested back into the business by Jeff Bezos, to expand the business. But after 2016 and especially after 2018, Amazon has started earning profits. And is now focusing on profitability too. Over the last few years, Amazon has raked in so much profit, but the credit for that mainly goes to AWS, because AWS is one of Amazon’s businesses with the highest profit margin with a profit margin of 30%. And it kept growing with time. Even in the last few years, Amazon’s expansion wasn’t stopped. Amazon Logistics saw good growth. Here, they are giving competition to the delivery service companies. Such as UPS and FedEx. These are big in North America. And because of these reasons, friends, today, Amazon could become a $1.6 trillion company. This was Amazon’s interesting story.