Race to One Trillion: Amazon’s invulnerable dominance

As the first part of an analytical series on Amazon and its rise to 1 trillion, this article considers the company’s success and uncontainable growth.

In September 2008 you could buy an Amazon share for $72. Now, you need $1’970.  At a whopping 39%, the average annual price increase has led Jeff Bezos’ creature to enter the exclusive 1-trillion market cap club. But Amazon’s exceptionalism is not limited to Wall Street. Of every dollar spent online, around 44 cents go through Amazon. With 100 million household members, “Amazon Prime” would be the 4th most populous country in the world.

To get here, Amazon rejected conventional corporate strategy. While in the 1990s, most VC-backed tech companies could at best raise $50mln to start off their activities, Amazon piled up a debt of more than $2bln before showing some returns. Even the overwhelming stock price surge would make little sense when looking exclusively at profits. Amazon’s 3.8% margin in 2018 Q1 is ridiculously small compared to Facebook’s 45-percent margins. Yet, blind to these numbers, investors are captured by Mr. Bezos’ effective investment strategy which combines evocative image-building and the establishment of ever higher barriers to entry.

Following a Tesla-like strategy, managers in the Seattle HQs are, in fact, deliberately investing in futuristic projects, a floating warehouse for instance, that are not likely to be profitable but pay great returns in image-building. And, being able to not care about profits, the firm is also able to take on investments on infrastructure that no competitor can afford. For every other firm, the cost of cutting down delivery times from 2 days to 1 day would be unsustainably high for such a marginal return. For Amazon, it is not only possible, but mandatory. The plan is to do or build whatever is so expensive that no other company can afford it, and then offer the possibility to use that infrastructure to competitors, for a fee. Companies like Macy’s or Target can do nothing but accept Amazon’s dominance. The result is that Amazon accounts for 23% of US online mobile phone sales. The Apple Store accounts for merely 8.

bezos
Amazon CEO and world’s richest man, Jeff Bezos. Drew Angerer/Getty Images

The recent acquisition of Whole Foods moves in this direction. Amazon had already entered the grocery sector with Amazon Fresh and Amazon Go, its first cashierless store. The Whole Food operation strengthened Amazon’s position in grocery shopping, one of the industries most exposed to the online-shopping disruption. More importantly, with the $13.2-billion acquisition, Amazon secured the 460 stores of the franchise, which, for the largest online retailer in the world, means establishing physical presence in most urban centres – close to the wealthiest households in the US. For every company selling online the biggest challenge is the “last-mile” problem – essentially, how to bring an order from a large warehouse in Staten Island to a rich household in the Upper East Side. With Whole Foods, Amazon is now close to overcoming this final obstacle.

Amazon’s empire still has enormous potential for expansion. It recently received the license to operate as an Ocean Transportation Intermediary, which will make it easier to ship to China. More than half of Amazon’s profits come from Amazon Web Services (AWS), a subsidiary renting cloud computing space. AWS’s size is astonishing. AWS has a 34% market share; the next competitor is Microsoft’s Azura at 11%. Amazon is big even where we do not know it exists.

Certainly, the 1-trillion threshold won’t be the last one to fall under Amazon’s power.

by Giovanni Pierdomenico

N.B. This article reflects the author’s opinions only.

 

References:

“The Four: the hidden DNA of Amazon, Apple, Facebook and Google”; Galloway S., Bantam Press (2017)

https://www.marketwatch.com/investing/stock/amzn

https://retail.emarketer.com/article/amazon-now-has-nearly-50-of-us-ecommerce-market/5b48c542ebd4000b24140992

http://time.com/5245969/amazon-prime-100-million-subscribers-jeff-bezos/

https://www.bloomberg.com/gadfly/articles/2018-04-26/amazon-earnings-being-jeff-bezos-is-good-so-are-gross-margins

https://www.digitalcommerce360.com/2018/03/13/mobile-sales-key-driver-q4-2017-online-sales-growth/

https://www.businessinsider.com/breaking-it-down-amazon-tough-negotiations-how-the-whole-foods-deal-went-down-2017-12?IR=T

http://fortune.com/2017/01/26/amazon-ocean-freight-business/

https://awsinsider.net/articles/2017/08/01/aws-market-share-3x-azure.aspx

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