Why Amazon Is Amazing To Me

11 February 2012 | talking about Internet, Leadership, Stock Market

I love Amazon.com. I buy almost everything I can from them. Retail, hosting, media, and more. I even own stock in Amazon. I am a very happy consumer and investor. However, what I find so interesting about Amazon is not my consumer joy or my nice gains as a shareholder; it is their business model. In so many ways they have re-engineered traditional business models. The single most fascinating aspect of Amazon to me is their way of monetizing business bi-products.

As an Internet retailer Amazon has to make major investments in data centers. Trust me: Amazon runs on more than just a Linux computer under Jeff Bezos’ bed. They have built data centers all over the world. Normally, this would be a cost of doing business. In order to sell products online they have to build data centers. Using the bi-product of having to build data centers Amazon built a billion dollar hosting business, Amazon Web Services. Amazon leverages their infrastructure and rents the use of this space to web sites all over the world. This is like Best Buy starting a construction company because they are building big box retail locations. Amazon turned what traditionally would be a fixed expense into a most likely very profitable business unit.

Another great example is Fulfillment By Amazon. Amazon has something like 60 different warehouses. They receive massive discounts on shipping. They hire tons of people that do nothing but take inventory off the shelve, package it up, and ship it. In fact shipping inventory is something Amazon does really well. Once again, this would be just an expected expense for an online retailer. With Fulfillment By Amazon merchants ship their inventory to Amazon and they store it until the inventory is sold. Amazon then packages up this inventory and ships it out for the merchant - for a fee of course - and this is valid for inventory sold on Amazon (Amazon Marketplace) or via the merchant’s own website. Amazon is allowing other merchants to sub-contract their warehousing, and shipping infrastructure to Amazon.

Some people might say there is a lack of focus here. How can you have all these different business units and maintain focus? Sort of a “Jack of all trades but a master of none”. In order for Amazon to stay on top in Internet retailing, they sort of have to be best in class in all of these areas. They are just opening up some typically private aspects of their business and providing a service. Running the best warehouses and data centers is something they have to do day in and day out anyway. Why not profit from the activity?

Amazon has a number of these examples. Of course online retailing is growing, but at the same time margins are decreasing. On the side lines, Amazon is building some very high margin businesses. This is why Amazon will continue to be an engine of growth for many years to come. As these high margin bi-product businesses grow they will out perform their retail peers. And I find that amazing.

 

tags: investment style, amazon, business

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