How Jeff Bezos made Amazon a $1.6 Trillion company? | Business Model of Amazon
We journey back to the year 1994 when Jeff Bezos made a significant decision. He left behind a comfortable job in investment banking to pursue an entrepreneurial vision. The internet was rapidly gaining momentum, and in that digital whirlwind, Jeff envisioned something transformative. He dreamed of creating an online store, a groundbreaking platform, and his first product line – books!
Choosing the right name for his new venture was a considerable task. At first, he settled on "Cadabra," derived from the magical incantation "Abra-Cadabra." However, this name turned out to be quite peculiar and often left customers puzzled or unaware of his company's identity.
Consequently, Jeff Bezos engaged in a quest for a more fitting name. He registered multiple domain names, contemplating the essence of an online bookstore. One of his thoughts was "BookMall," which still leads to Amazon.com today. Ultimately, he found the perfect moniker, "Amazon," inspired by the vast Amazon rainforest and river, aiming to make his creation the largest bookstore in the world.
Fast forward 25 years into the future, and Amazon isn't merely the world's largest bookstore but a multifaceted e-commerce giant. Amazon Prime Video dominates the world of streaming, Amazon Web Services reign supreme in cloud computing, and Amazon's influence extends to various domains with products like Alexa, Kindle, Amazon Drive, Amazon Music, Audible, Amazon Pay, and even grocery delivery through Amazon Fresh.
Amazon's foray into the smartphone market with the Amazon Fire, although a short-lived venture, couldn't overshadow the company's immense success. Amazon's journey from a humble online bookstore to a conglomerate spanning multiple industries raises the question – how was this remarkable transformation possible?
This video dives into Amazon's business model and unveils the key to its success.
"Jeff Bezos made history as the first person to amass a net worth of $200 billion."
"I was always a dedicated student, willing to put in the hard work. I was a bit of a nerd. What matters most to me is not being purely an internet company, but providing the best customer service."
The concept behind Amazon was surprisingly simple yet revolutionary. It aimed to create an online bookstore at a time when people physically visited bookstores for their literary needs. Amazon's website started as a humble online bookstore, offering thousands of titles in one place – a practical and convenient idea.
Remarkably, Amazon achieved early success even as a startup. The website was launched in 1995, and by December 1996, it had already amassed a customer base of 180,000. The figures continued to rise, and by 1997, Amazon's revenue reached a staggering $148 million. It was during this phase that Jeff Bezos decided to transform Amazon from a private entity into a publicly traded company to gain access to more funds for expansion. In 1997, Amazon went public, and by 1998, its revenue had climbed to $600 million.
Two primary factors contributed to Amazon's success. First, it offered unparalleled convenience to customers by providing an online marketplace when competitors were virtually nonexistent. Second, Amazon leveraged what is known as the "Flywheel Effect." In this model, Amazon sold books at competitive prices, and the vast selection delighted customers, creating a positive feedback loop. Satisfied customers attracted more customers, which, in turn, drew booksellers to the platform, especially third-party sellers. As more sellers listed their books on Amazon, customers benefited from an expanded selection. It was a self-propelling cycle that intensified as Amazon used profits to improve the website, enhance customer experience, and keep costs low.
In 1998, Bezos decided to replicate this strategy to expand beyond books into computer games and music. This expansion saw unprecedented success, to the extent that in 1999, Jeff Bezos was named Time magazine's Person of the Year.
Amazon continually embraced innovation, both major and minor, driving the company's growth. One noteworthy example was the introduction of the "1-Click" button. It allowed customers to make swift, one-click purchases, significantly enhancing convenience and increasing sales. Amazon patented this technology, giving the company an edge. It served a dual purpose, making purchases more straightforward for customers while simultaneously gathering data on their buying preferences to offer targeted product suggestions.
In 2000, Amazon Marketplace was launched, enabling third-party vendors to sell products on Amazon's platform, expanding the business while minimizing storage and warehousing costs. This venture laid the foundation for Amazon Web Services (AWS), the cloud computing giant that dominates its field.
In 2007, Amazon made another groundbreaking move by introducing the Kindle e-reader, transforming reading habits. Importantly, Jeff Bezos decided to offer the Kindle as a "Zero-Profit" device, earning solely from e-book sales, not the device itself. This strategy paid off handsomely, making Kindle the world's leading e-book reader.
One common theme throughout Amazon's story was its ability to seize "First Mover Advantages" when entering new markets. This meant being the first to establish a substantial presence in emerging fields, although maintaining this position required continuous innovation.
Amazon's colossal growth did come with occasional stumbles, such as the failed launch of the Amazon Fire smartphone in 2014. By that time, the smartphone market was fiercely competitive with well-established players, and Amazon's entry came too late.
Overall, Amazon's ascent in various markets showed a clear pattern: the first-mover advantage was followed by relentless innovation to maintain dominance. In the areas where it couldn't secure this first-mover advantage, Amazon faced fierce competition and occasional failures.
Amazon's expansion into India provided a clear example of this. Flipkart, established in 2007, had a significant first-mover advantage in the Indian e-commerce market, and it remained a formidable competitor even after Amazon's entry in 2013. As a result, Amazon and Flipkart share a near-duopoly in the Indian e-commerce sector.
Amazon's revenue streams reveal its diverse range of businesses. In 2020, the online store generated over $200 billion in revenue, while AWS emerged as a highly profitable segment, with a profit margin of 30%.
Amazon's financial journey was marked by years of reinvestment of revenues to expand the business. From 2014 onwards, the company shifted towards profitability, with AWS playing a significant role.
In the last few years, Amazon's influence has continued to expand. Amazon Logistics, for example, directly competes with delivery service companies like UPS and FedEx, particularly in North America.
Today, Amazon is a colossal $1.6 trillion company, but its transformation from an online bookstore to a diversified conglomerate, as this video demonstrates, is a fascinating journey.