Tech companies like Amazon have gotten really big, really fast. In the past decade, Amazon has overtaken many long-established stores in terms of market value, now being worth more than twice the market cap of Walmart, despite having less revenue. (Tradingview, 2020). To understand how Amazon went from a regular online bookstore to a highly influential mega-corporation, we need to understand how they beat their competition.
The retail business has one of the lowest margins compared to other industries (Ross, 2020). Compared to that, other industries like cloud services have close to zero marginal cost, resulting in huge profit margins. Despite cloud services and retail not having anything to do with each other, Amazon decided to enter the cloud services industry with their platform AWS (Amazon Web Services). This service now makes up about 13% of Amazon revenue. More interestingly, on the profit side, a mind-boggling 71% of Amazon’s operational profits are coming from AWS (Levy, 2020).
This profit can be used to subsidize Amazon’s own retail business, keeping the prices low and the quantities high. This further leads to economies of scale, powered by the immense amounts of data Amazon can collect. Consequently, Amazon can outgrow retailers like Walmart by having more effective personal advertising, predictive stocking and the development of its increasingly omnipresent brand ‘Amazon basics’. Moreover, it allows Amazon to enter different markets with concepts like Amazon Fresh, Amazon Prime, Amazon Video and many more. Amazon is not the only company making use of this strategy. Other corporations like Samsung and Apple are also moving towards a conglomerate strategy, offering more than just one product/service in one industry.
This non-conventional strategy currently flies under the radar of most anti-trust policies, resulting in a new form of competitiveness. Firms like Amazon, Samsung and Apple are using their power to become even more powerful, leaving little room for other competitors.
References:
TradingView. 2020. Large Cap (Big Cap) Stocks — USA — Tradingview. [online] Available at: [Accessed 6 October 2020].
Levy, N., 2020. Amazon Web Services Approaches $9B In Quarterly Revenue, But Growth Slows Again, Missing Analyst Expectations. [online] GeekWire. Available at: [Accessed 6 October 2020].
Ross, S., 2020. What Is A Good Profit Margin For Retailers?. [online] Investopedia. Available at: [Accessed 6 October 2020].
