Amazon Owns Everything

December 19, 2021 – I had given the last paper of my CA Final Attempt. The first few days went by on OTT platforms like Amazon Prime and Netflix. Later on, I wanted to start something productive – so I started reading books for which I used my Kindle, purchased a planner from Amazon, started listening to podcasts on Amazon Music and suddenly I realised something.

A. Amazon’s Dominance

Generally when we think of Amazon, we have in mind “www.amazon.in”, the e-commerce platform. But that is just a tiny fraction of what Amazon really does. Amazon is basically at war with everyone:

A1. Amazon is at war with everyone

OTT Platforms: Hotstar & Netflix v/s Amazon Prime (19% Market Share)
E-Commerce: Flipkart & Myntra v/s Amazon.in (31.2% India’s Market Share)
Audio Books: Storytel & Scribd v/s Audible (41% US Market Share)
E-Readers: Kobo v/s Amazon Kindle (75% US Market Share)
Smart Speaker: Google Home & Siri v/s Amazon Alexa (80% India’s Market Share)
Music: Spotify & Saavn v/s Amazon Music (13% Global Market Share)
Wallets and Payments: Google Pay, PayTM & PhonePe v/s Amazon Pay (2% India’s Market Share)
Cloud Services: Microsoft Azure & Google Cloud v/s AWS (32% Global Market Share)
Logistics: FedEx & Delhivery v/s Amazon Logistics (21% US Market Share)
Game Streaming: YouTube Gaming v/s Twitch (91% Global Market Share)
Content Ratings: Rotten Tomatoes v/s IMDb (~88% of Web Traffic)

This infographic by Finshots aptly summarizes this:

And these are only the brands known in India which I have mentioned, not their overseas ones – which include *Amazon Flex, Amazon Robotics, Amazon Fresh, Amazon Game Studios, Amazon Publishing, Washington Post and many more.

And it is not like these are just okay versions in their respective categories. Most of them are market leaders – Be it Amazon Prime, Amazon.in, Audible, Kindle, Alexa, Amazon Music, AWS, Twitch or IMDb.

A2. Amazon’s Expansion Plan includes satellites and AI!

This does not end here. Wait till you listen to their expansion plans:

Amazon is planning to compete Elon Musk’s Starlink with its own Satellite internet called Project Kuiper. For the uninitiated, they are planning to launch 3,000 satellites into the atmosphere to supply the world with high speed internet.
Amazon is also investing over $1.5 billion in its own Amazon Air Hub in order to speed up its deliveries.
Amazon is now not only continuing as an online store, but has even started to revolutionize the brick-and-mortar stores as well. It has already started investing in Cashier Free store and biometric payments technology with Amazon Go.
Amazon is allegedly planning to introduce a home robot codenamed Vesta.
Well, how can an article in 2022 go without talking about the metaverse? Although Amazon is muted on its VR plans, it could potentially be a big player in the way we shop in the metaverse. What do you think? Let me know in the comments.

These expansion plans may seem like they are unrelated, if you analyze it on a deeper level, you can see how these different pieces may later connect together, like:

Driverless vehicles delivering your Amazon packages
. Maximum 1-day delivery turnaround even with goods kept on the other end of the world through its Air Hub.
Home Robots replacing Alexa in your smart homes, etc.

Source: ABC Supply Chain

A3. Did you Know about Amazon’s Subsidiaries?

And these are only projects we can see on the face under the Amazon brand. What about its subsidiary brands?

It has acquired Home Security Ring for $1 billion – and this was not for the technology, but for the market share in the home security market.
Another $1 billion acquisition went towards acquiring Zoox, which is in the autonomous vehicles category.
It entered into the grocery and food delivery business by acquiring Whole Foods Markets for a whopping $13.7 billion valuation.
And you already know about the gaming livestream site Twitch and the movie database IMDb.

In fact, Amazon has its presence in 9 out of the top 10 industries in US by GDP – ranging from information industry to selling technology to the government.

B. The Amazon’s Genius

Whenever you purchase the Amazon prime subscription, you become part of the Amazon ecosystem – you probably buy a Fire Stick to watch you Prime Video movies, which you can control from your Amazon Alexa, which you bought from Amazon.com which runs on AWS. So once you become a part of the ecosystem, it will become very hard to leave it. And this is just expanding.

Source: YouTube Magnates Media

And the branding of Amazon today has become such that no market is really off-limits for them. Whether it be:

The drones tech (to help their e-commerce business),
Groceries business (a sensible horizontal integration),
Home security & smart devices, AIs and robots (to complement its Alexa Ecosystem), and
Even satellites (To support its AWS platform)

Everything just makes sense! The same cannot be said for instance, if Netflix some day decides to start a groceries business.

B1. Amazon’s Business Strategy

There are 2 major strategies responsible for Amazon’s success:

1. Willingness to expand aggressively at the expense of profits so as to establish dominance

At the heart of Jeff Bezos’ business strategy has always been to establish scale i.e. prioritizing growth over profits.

2. Integration across multiple business lines

Vertical integration is also at the heart of Amazon’s strategy. They basically want to own the whole supply chain:

Right from making the product themselves;
Storing the products themselves
Selling the products through their own platform;
Accepting payments from their own gateway; and then
Delivering the products with their own delivery teams.

And their entire expansion plans revolve around streamlining this integration.

B2. Amazon’s Business Model

Now a bigger question arises that if Amazon is selling at such lower prices, how is it cash positive since 2002?

Some wrong Assumptions

Some potential explanations as provided in the research paper “Amazon’s Antitrust Paradox” – could have been:

It is using the profits from AWS to cross-subsidize losses in the retail division; or
It is using money from investors to subsidize these losses.

For the first reason, let us analyze the financials of the Company. The Sales of the Company has been as follows:

Source: Amazon Annual Report 2020

Thus, apart from AWS, major revenue comes from Online Stores and Third-party seller service (i.e. fulfillment and shipping services out of online orders). So, we can basically categorize the financials as AWS and Others (Majorly Online Stores).

The breakup of the Operating Results has been as follows:

Source: Amazon Annual Report 2020

Thus, AWS has been a major contributer to the Operating Income. But, even if we talk about Online Stores, they have been cash positive in North America, and only place where it has been cash negative lately, is in the International market, which is reasonable as it was in its expansion phase there.

Moreover, since Amazon has not raised any funds since 2003, the second explanation is also not true.

So then, how does it make money?

Despite major revenue coming from Online sales, the real profits come from 3 places:

their AWS Segment, the most profitable segment;
the upcoming market of subscription services like Amazon Prime; and
the fast-growing online ad market, which it has a monopoly in along with Facebook and Google.

Since Amazon does not provide a further break up of its operating income, this is what my analysis concludes. Let me know your thoughts in the comments.

B3. Jeff Bezos’ Vision with Amazon

In 1997’s Letter to the Shareholders, Jeff bezos had a vision to reinvent what it means to serve customers by unlocking the power of the internet.

In his letter, he had stated this:

We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model.

The strategy has remained the same even today – consumer centric approach, obtaining market leadership over short term profitability and making bold decisions when they need to be taken.

B4. The End Game

It is not unrealistic to imagine that Amazon’s dominance in almost every market is going to keep growing and growing, until Jeff Bezos essentially wins capitalism.

In fact, their biggest threat today is going to be the governments – the possibility of anti-trust regulations being applied on them (discussed in the next section).

C. Is Amazon covered under Anti-Trust Laws?

I believe that Amazon is on its way to become the Standard Oil Company of the 21st century. There are possibilities that anti-trust regulations would be triggered in future, however, currently the anti-trust laws are not applicable on Amazon – partly because their tactics hurt other businesses, not the customers.

However, I believe that the anti-trust laws are not developed enough which should otherwise be regulating Amazon in certain ways. I say this because of the following reasons:

The current anti trust laws do not appreciate how integration across distinct business lines may prove anti-competitive. This is because horizontal power in one market creates leverage for entry to another market.
It is difficult to prove how the use of accumulated marketplace seller data and customer data by Amazon as a retailer affects competition.
Since online platforms are intermediaries, when they enter into a competing business, they control the essential infrastructure on which their rivals depend. This is undermined under the current anti-trust laws.

For example, let’s say Amazon were to manufacture a monitor stand and sell it on Amazon. It would use the data it has collected from other monitor stand sellers on its platform and analyze what the consumers need and build its own monitor stand based on that. It would brand it as an “Amazon Basic” and price it at a price much lower than its competitors providing the similar features and quality. Moreover, in the search results, will show this item in priority to all others.

This comes to show how it was able to use its financial backing, accumulated marketplace data and control on the e-commerce infrastructure to disrupt the monitor stand market. And it can do this practically for every product out there, whenever it wants.

In other words, it is able to extract wealth that other businesses are creating, without facing any anti-trust regulation. Lina Khan, director of legal policy at Opens Market Institute said that:

…a rule that prohibited it from competing with the businesses that use its platforms would eliminate a lot of the core conflicts…

What do you think, if Amazon is selling its products at such low prices, wouldn’t it count as predatory pricing and thus, attract anti-trust laws? Do comment your views on this.

D. Is Amazon’s unprecedented growth a good thing?

Amazon majorly has cost leadership in everything it does and that is its major competitive advantage over its competitors. And because of all this, it is eventually leading to lower prices for the end consumers. In fact, I realised that whenever I go to buy something, I first check the rate quoted on Amazon. The brick-and-mortar stores have to now compete with this online price.

So it raises an interesting question – whether Amazon’s continued growth is a good thing?

Some people say that if amazon keeps innovating, keep lowering the prices, keep improving delivery speeds, then that’s what really matters. After all, they are putting the consumers first.

But some other people say – at what cost?

E. The other side of the coin

Now you must be saying – Then market dominance is a good thing right? True, as a consumer, I love Amazon, but let us look at the other side of the coin:

E1. Death by Amazon

Amazon has always been a consumer centric business. But let us talk about the other stakeholders:

For the workers, Amazon has been continuously accused of treating workers as robots.

For its partners, Amazon has been nothing less than a predator:

– In order to provide such competitive prices, it squeezes its suppliers and producers of the last drops of margins they can earn.

– Amazon is in control of which books is found by the audience and which are not. In other words, Amazon shapes as to whether a particular author will be able to find an audience of its content. It even dictates the price at which an author will sell its book, as if the author disagrees and is not listed on Amazonbooks, his books will never sell as most consumers today buy books from Amazon. This is true for so many other products as well.

– Amazon has even thrown their own startup investment Nucleus under the bus by releasing a probably copied version called Echo Show – showing that they will do anything if it means that it will extend their tentacles into each and every home of the world.

Left: Nucleus; Right: Amazon Echo SHow

From the angle of competitors, a popular term has been coined – Death by Amazon. For the competitors, it has become like the great white shark. Thanks to the profound understanding of its customers along with the massive financial backing, it can enter into any market and disrupt it entirely. This potentially hurts the local communities and small business owners.

In fact, one can argue that an analogy can be made in this regard with Reliance. What do you think, is Reliance India’s Amazon? Let me know in the comments below.

E2. What! Amazon is competing with its own customers?

By involving itself with multiple, related business lines – it becomes inevitable that Amazon’s customers are also its rivals. For example:

Amazon Basics competes with other retailers on its e-commerce platform, who in turn many a times also use Amazon’s delivery and warehousing services.
The Media companies (Eg. Netflix, Prime, etc.) that compete with it to market content also use its platform or cloud infrastructure (AWS).

All these integrations and arrangements create conflicts of interest for Amazon. Moreover it will always stay ahead of its competition, thanks to the volume of data it has collected on its consumers.

E3. Data Privacy (if it still matters :P)

Well, for starters, it just means that Amazon, just like Facebook, will have (if not already) massive data on us. Amazon knows where you live, who you live with, your current location (if you use an Amazon smartphone app), what TV shows you watch, what music you listen to and what websites you visit.

You ask why that matters? Well, taking advantage of our data could come in so many forms – the Cambridge Analytica case is one of those.

E4. Error 502, only much worse

To understand this, let us analyze one of the sectors Amazon is the global leader in – Cloud Services.

The “Cloud” – a magical space above the Troposphere where your data resides – Well, obviously no. Cloud services are basically an infrastructure and delivery mechanism where your data is stored in massive massive servers around the world connected with miles and miles of fibre optics infrastructure supporting all the data traffic.

The Cloud essentially powers a huge portion of the entire internet, including Netflix, Twitch, Facebook, Twitter and even intelligence agencies like NSA, US and CIA.

Since they are physical servers, any server outage of a cloud company will be detrimental for every user using their services. For example, I assume that you must have seen this picture once in your life:

That was a result of a Google server outage. Now just imagine, your workflow revolves around the Google ecosystem and you were just completing your presentation which you have to present to your highest ticket client, and you receive a message that Google server is down! Not only in the work ecosystem, but your doorbells and CCTVs may also stop if you were using the Nest ecosystem.

Now, AWS has 32% Global Market Share in the Cloud services platform against the 7% Market Share of Google! Any prolonged outage could effectively mean stoppage of work, home security outage, etc.

Conclusion

All said and done, there are few major conclusions which can be made based on our discussion till now:

From solely business per se, their business strategy of cost leadership is good for business and since it is beneficial for the consumers, anti-trust laws are not triggered.
Their vertical integration masterplan is something which any budding entrepreneur should learn from – how an online bookseller turned out to control the world’s supply chain.
With Amazon increasing its size exponentially over time and having so much control and power, do they also need more responsibility? – towards the safety of the consumers as well as towards other stakeholders.
The regulatory aspects with regards to data privacy, anti-trust laws, labour laws, etc. are still in their nascent stage for the new generation of things – tech giants ruling the world, concepts of crypto, metaverse and so much more! It will be interesting how they will turn out in the coming years.

Even after all this analysis, there are still so many questions in mind, especially what will be Jeff Bezos’ endgame? What do you think, let me know in the comments below!