Under The Spotlight: Amazon (AMZN)
Giving up on profits in the present, in favour of higher cash flows in the future may explain how Amazon become one of the biggest companies in the world. What started as a garage book retailer is now a US$1.6t company running the internet and e-commerce. Read on to see how Amazon became Kings of the Jungle.
“The way I see it, Amazon is a philanthropic organization run by investors for the benefit of consumers.”
That’s how journalist Matthew Yglesias described the company in 2013, criticizing the management, which despite growing revenues over the past 20 years, had not yet registered profits. Its founder, Jeff Bezos, liked the description so much that he used it in his annual letter to investors that same year.
It may seem strange to see Amazon being compared to an NGO, but perhaps this is a key point to understanding how it went from a book retailer founded in a Seattle garage to become one of the biggest companies in the world: giving up on profits in the present, in favour of higher cash flows in the future.
It is now common practice in business management, and it is no exaggeration to call Bezos a visionary when adopting this stance at Amazon, withstanding heavy criticism when he implemented this policy in 1997. Bezos knew what he was doing. Some, like Yglesias, still didn’t understand. Eight years later, with the company’s revenue jumping from about $63 billion in 2013 to more than $419 billion in 2021, there doesn’t seem to be much room for doubt any longer.
Ahead of his time
If today Bezos is seen as a man ahead of his time, that wasn’t always the case. The founding of Amazon was actually the result of his disappointment in missing out on the boom that the internet was going through in the 90s. Originally, the company only sold books, a relatively standardized product with a low shipping cost, which made it easier for the company to achieve economies of scale in logistics. This, however, was not the key point.
Anticipating a trend that would become dominant in the years to come, Amazon was a book marketplace, connecting sellers and buyers across the United States without actually having to manage any inventory. In 1997 this would even be a reason for prosecution when the bookstore Barnes & Noble sued Amazon because it claimed to be “the largest bookstore in the world”, which according to the accusers would be a lie, as it was just a “broker” of books.
Barnes & Noble lost the lawsuit, but eventually, Amazon would no longer be the world’s biggest bookstore: not that another company outperformed it, but Amazon would become the world’s biggest retailer, selling everything from A to Z, as indicated by its logo. In 2020 alone, its e-commerce revenue generated more than US$ 197 billion and, in 2021, just on Prime Day, the company’s commemorative date, it is estimated revenue of more than US$ 11 billion.
The rent of warehouses and distribution centres to improve the company’s delivery times were fundamental for the company’s growth but soon Amazon became a victim of its own success. Amazon’s servers and databases were not being able to support traffic on high-volume access dates, such as black Friday, for example.
Flying through the clouds
The year was 2003 and after suffering revenue losses caused by problems in the IT infrastructure, Bezos gave Andy Jassy the mission to solve this technology deficit, making it no longer a bottleneck for Amazon’s growth. The deal went so well that Jassy was tapped with about 50 employees to start Amazon Web Services (AWS), believing that if Amazon had IT problems, thousands of other companies would too.
Today AWS is a colossus worth over $54 billion, but this giant is invisible to many. AWS provides server and cloud computing solutions for many companies around the world. Among some of its best-known customers are Netflix, Samsung, Zoom and Snapchat. If you use any of these companies’ services, you are certainly using AWS’ services. By the way, if you’re reading this article, you’re probably also using an AWS server, as the company accounts for over 33% of the entire cloud computing industry.
AWS currently has the highest operational revenue in the Amazon holding, generating more than $13.5 billion in operational revenue in the first quarter of 2021 alone. Despite the higher sales volume, the retail sector operating expenses are very high, whereas economies of scale in AWS, like in most technology industries, makes it much easier for costs to be compressed and thus increase operational revenue. Therefore, many analysts and investors in the company even advocate a split between Amazon and AWS, even though the company’s CEO says that this change is not in the company’s plans.
Out with the old and in with the new
In 2021 Amazon is undergoing perhaps its biggest change since the birth of AWS: the change of its CEO. Jeff Bezos leaves the company and confers the title of president on Andy Jassy, who then starts running the company. Jassy’s choice follows a move similar to that made by Microsoft, when its founder Bill Gates stepped down as president, being replaced by Satya Nadella, who previously headed the company’s cloud division.
This shift states that Amazon is positioning itself increasingly as a technology company, not just a mere retailer (after all, how many retailers create something like Alexa and AWS?). Jassy says he will follow Bezos’s footsteps, most likely continuing the central idea of his predecessor’s entire management philosophy: prioritizing the generation of future cash flows, even if it means having to sacrifice immediate profits for the shareholders. But judging by the more than 1,000% rise in AMZN share price since journalist Matthew Yglesias criticized that stance in 2013, it appears that the market has learned the true value of future cash flows.