Amazon — A Visible Monopoly

While most of us (people/companies) are still feeling the effects of this ongoing pandemic; Amazon is literally in a band-emic (bands the colloquial term for money). In the last 3 months of 2020, due to all our impulse spends and inability to leave our houses Amazon made $125bn in revenue — making it their first quarter over $100bn.

What does $125bn even mean?

To be honest the number is difficult to comprehend but let me give you some comparable data points:

• For the property people: All the property in SW1 (Westminster, Belgravia, Pimlico) is worth 60% of the revenue Amazon made in the last 3 months ($75bn)
• For the economists: If you doubled Croatia’s 2019 (nominal GDP) you still would not reach Amazon’s revenue in the last 3 months
• For the romantics: The total amount of US valentine’s day spending since 2015 amounts to $125bn (reword)

In the last 10 years, Amazon has invested $18bn dollars and they’ve turned every major cost into a source of revenue. Investing billions into AWS now means that they have a 47% market share, which can be interpreted as 47% of the internet that we interact with uses AWS.

Company History

If you haven’t seen this famous picture, you’ve clearly managed to avoid all internet motivational speakers — hats off to you.

Amazon was founded by Jeff Bezos who graduated from Princeton with a degree in electrical engineering and computer science. After graduation, Bezos turned down positions at established companies including Intel (like turning down a job at google today), Bell Labs (Facebook) and Anderson Consulting (McKinsey & Co). He decided to join a start-up who were trying to develop a global telecoms network for trading companies, he spent 2 years here trying to get the firm off the ground but unfortunately it failed. He then left to join Banker’s Trust (now Deutsche Bank) as a product manager, after spending 2 years here he left to join D.E. Shaw (highly coveted amongst the WSO community).

At D.E. Shaw Bezos was tasked with researching new online business opportunities, he made a list of 20 products he could sell online and decided books were the way forward. Even though he was asked to do this by D.E. shaw the board wasn’t really on board with his idea and he decided to quit and go out on his own.

So in 1994, Jeff raised $1m from family and friends (hope my friends are reading this) of which $300k came from his parents. Within 30 days Amazon was doing $20,000 per week in sales.

In 1995 he raised $8m from Kleiner Perkins and in 1997 he IPO’d at $18 a share — worth $438m at that time (current share price $3,352)

With all that background, let’s take a look at where they are today

Revenue & Profit

In 2020 Amazon made $386bn, with $125bn coming from Q4.

Amazon’s revenue streams can be broken down in the following way:

• Online store (Amazon.com) — product sales made on Amazon’s website — $197bn
• Third-party selling — people can list items to sell through amazon’s marketplace and amazon makes money by taking a commission and also a fulfillment fee — $80bn
• Ad Revenue + other — Third-party vendors can also boost their products by listing ads within Amazon, that’s why some vendors complain its a pay to play market — $21bn
• Physical stores — Amazon owns whole foods and also operates other physical stores, you may have seen the Amazon Go concept store — $16bn
• Subscription services — Amazon prime is a household name by now, I’m not sure I know anyone who doesn’t have it (or have access to it) — $25bn
• AWS — AWS offers hundreds of cloud-based services including storage, analytics and AI (we’ll take a closer look later) — $45bn

It’s important to make the distinction between Revenue and Profit. AWS only accounts for 12% of Amazon’s revenue however it makes up 60% of amazon’s profit. This tells us that Amazon is actually making most of its money in AWS and while the other businesses are profitable, they cost more to run.

Unit Economics

For every dollar spent in revenue on the online and physical eCommerce, amazon makes 2.7 cents (that’s why it’s called the 1p business)

For every dollar generated in revenue from AWS amazon makes, 28 cents — 10 times more! I hope it’s now clear AWS is Amazon’s crown jewels, let’s delve a bit deeper.

AWS

AWS is made up of different cloud computing products and services, so the important questions that need to be answered:

Why do we need to run things in the cloud?

Cloud computing is essential to all the largest web applications we use on a regular basis — all social media, online banking, e-commerce, transport. Essentially any website that has or generates a large amount of data uses cloud computing, the reason for this it allows companies to scale their operations almost seamlessly.

For you to build the next big start-up you no longer need to purchase 1000’s of servers or hardware, you can just buy the products you need on AWS — and as your needs grow your website can grow with you. Alongside this AWS is very secure, reliable and cheaper than you trying to do it yourself.

Who currently uses AWS?

AWS has 1 million active users and a market share of 47%.

AWS’s top 10 clients and their monthly EC2 (just one of the services, it allows websites to quickly scale with demand) spend are:

1. Netflix — $19m
2. Twitch — $15m
3. Linkedin — $13m
4. Facebook — $11m
5. Turner Broadcasting — $10m
6. BBC — $9m
7. Baidu — $9m
8. ESPN — $8m
9. Adobe — $8m
10. Twitter — $7m

The list above only includes names that publicly disclose they use AWS, it’s reported that Apple also uses AWS and spend over $30m a month on the service.

AWS is considered to be a ‘multi-trillion-dollar monopoly hiding in plain sight’. Investors estimate that by 2025 Amazon will be a $3 trillion company:

• The retail arm will be worth $1 trillion
• AWS will be worth $1.5 trillion
• The other will be worth $0.5 trillion

The drivers behind AWS’s growth:

• Server costs account for a large percentage of software companies revenue — Facebook spends 16% on server infrastructure (AWS)
• Over time these companies will become more dependent on this infrastructure and will be economically unfeasible for them to build their own — if someone is doing it better than me and for cheaper why would I try and re-invent the wheel?
• AWS is cheaper than most alternatives for most businesses — Chamath reported 100% of all social capitals portfolio companies run on AWS
• AWS is essentially a tax on the internet — companies won’t be able to create their own yet can’t survive without it

As the internet grows AWS will undoubtedly keep growing, it seems as though this will be Amazon’s key focus for the next few years with Jeff announcing he’s stepping down as CEO and Andy Jassy (current AWS head) will replace him in that role.

HTMM Opinion

The biggest threat to Amazon right now is the US Department of Justice — specifically anti-trust.

Amazon’s share of the US e-commerce market is now 49% — half of everything bought online in the US is bought on Amazon. AWS’ share of the cloud services market is now 47% — half of all cloud services needed by companies.

Amazon started out selling books however in 2000, they invested money into expanding this idea into all products. Amazon did not expect to make a profit for a number of years and spent 2005–2015 investing $18bn into expanding retail, AWS and turning all their major costs into a source of revenue. Amazon spent years investing in creating an ecosystem around itself:

• As an e-commerce business we ship a lot, let’s start a fulfillment business so we don’t have to pay for that
• As a website we have to pay server costs, let’s start AWS so we don’t have to pay for that
• We take a lot of payments on our website, let’s start Amazon payments so we don’t have to pay for that

In 2020 democrats claimed that Amazon alongside Facebook, Google and Apple enjoy ‘monopoly power’ and even went as far as recommending big changes. They spent 16 months investigating competitive practices at these companies and produced a 450-page report claiming they are all a threat to consumer welfare.

While it’s not clear if Amazon is a monopoly overall it is definitely dominant in the industry it started in — online books — they control 75% of online sales of physical books.

If Amazon is truly a monopoly then the answer would be to split it up? The only precedent of this being done was in 1911 when Standard Oil — John D. Rockefellers company was split up into 36 separate companies including some that are still around Exxon, Amoco & Chevron.

Personally, I’m not convinced there’s much they can without asking Amazon and AWS to separate into two different companies — however, this will just make AWS more profitable as a stand-alone business.

Hot take

If they try to break up Amazon they’re first going to have to get through Apple, Google, Facebook and Microsoft — MS Office has enterprise software by its neck, do you know a company who doesn’t use MS office?

— £m€m