Why Is Amazon So Successful?

Amazon (NASDAQ: AMZN) started out in July 1994 as an online book store, founded by current CEO Jeff Bezos. These days, it is a behemoth glob

Feb. 8, 2020

Amazon (NASDAQ: AMZN) started out in July 1994 as an online book store, founded by current CEO Jeff Bezos. These days, it is a behemoth global tech company with its main business being e-commerce. It also has a foothold in numerous other sectors such as cloud computing, artificial intelligence, and digital streaming. 

Amazon’s business model

Amazon has dominated the online retail space for a long time and it is also competing with the giants of brick-and-mortar retail. 

The key to its e-commerce model is the 175 fulfillment centers it has around the world. The company has invested heavily in this network to maximize its efficiency. Across the U.S., same day or next day delivery is the norm for Amazon Prime subscription holders, with Amazon aiming to roll out the same level of service globally. 

While there are significant warehousing capabilities at Amazon facilities, they only hold a small portion of the goods sold on the platform. Oftentimes, Amazon never touches these goods, with the suppliers shipping them directly to the consumer. Third-party sellers account for more than half of all unit sales on the platform. Transport cost reduction is constantly being targeted as one of the main factors of Amazon’s success.

Another major part of its business model is Amazon Web Services (AWS). This is a highly profitable revenue stream and is made up of a few different parts of the web services space, such as data storage and hosting. For example, Netflix (NASDAQ: NFLX) is 100% hosted on AWS, which the offering manages comfortably despite this streaming service accounting for about 13% of global internet traffic.  

How does Amazon generate revenue?

The cornerstones of Amazon’s revenue are through retail, web services and subscriptions. Since purchasing Whole Foods in 2017, physical stores have also become a decent driver of revenue, with $17.2 billion in revenue generated in 2019.  

There are three different segments to the business, being North America, International, and AWS. The first two of these segments represent the retail sales and subscriptions for Amazon in these regions.

Retail sales account for the bulk of North American revenue. Its subscription services such as Amazon Prime account for about 6.7% of total revenue. This service provides free shipping and streaming of TV shows and movies. Currently, there are 150 million Prime subscribers globally. Generally, the International segment does not perform as well as the others, having often lost $1.7 billion on the segment in 2019. 

AWS has been in operation since 2006 and it had a 26% operating margin in Q4 2019, making it the most profitable part of Amazon’s business. In the final quarter of 2019, AWS’s operating profits were up 18%, with revenue constantly growing each quarter.  AWS works with the likes of government agencies, academic institutions, and businesses to help store their data and help to adequately deliver their content offerings. AWS has a 32% market share in the cloud computing space. 

Total Amazon revenue for 2019 hit $280.5 billion, a 20.5% increase year-on-year. Online stores accounted for $141.25 billion, with third-party seller services reaching $53.76 billion. The next big driver of revenue was AWS with $35 billion revenue for the year followed by $19 billion revenue from subscription services and $17.2 billion from physical stores.

Future plans

One of the areas that Amazon is looking to expand is in advertising. This is a lucrative source of revenue for tech rivals Facebook (NASDAQ: FB) and Google (NASDAQ: GOOGL). The company is well-positioned to quickly scale up its advertising offering as the platform is already a major hub for consumers looking to conduct their shopping.

Another major area that Amazon is pursuing is the pharmaceuticals space. This market is worth $400 billion annually in the U.S. and Amazon bought online pharmacy PillPack for $750 million in 2018. The goal is to provide extremely fast delivery of prescriptions all across the US initially.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Amazon. Read our full disclosure policy here.