How did Amazon get so big
How did Amazon get so omnipotent?
Amazon started as a ridiculed idea: to sell books over the Internet. Today it's an e-commerce giant that can bring down the big names in the industry while changing the way we shop. Plus, it's an integral part of the internet backbone. And with its assistant Alexa, it wants to be ubiquitous in our future. How could this happen? What can be learned from history? Jan Tißler took a closer look at this for this article.
Amazon is breathtakingly big today. In 2018 the company had sales of 233 billion US dollars, or around 205 billion euros. For comparison: It is almost on par with Germany's top-selling company, Volkswagen (235.8 billion euros).
But when did Amazon get so big? 2016, says Alexis C. Madrigal in his article for The Atlantic magazine. He sees this as a crucial year and uses a number that Amazon announces in its quarterly reports: how many square meters of real estate the company owns. He visualized it in this graphic:
Specifically, according to its annual report for 2018, Amazon now has 26.76 million square meters of warehouses, offices, shops and data centers. 2017 was the year of the greatest growth: 6.93 million square meters were added. That's more than Amazon's total in 2012 (6.79 million square meters). And by then the company was already the largest online retailer in the world. Another comparison: Amazon's real estate holdings are 48 times larger today than they were in 2004.
As Alexis C. Madrigal points out, this enormous growth is mainly being driven by more and more warehouses. Amazon wants to be able to deliver goods to more and more customers faster and faster.
The beginnings of this amazing company, however, were more than humble and, as so often in these stories, can be found in a garage. In 1994 Jeff Bezos started Amazon as an online bookstore. Originally, the offer should be called "Relentless" ("merciless"). The company was initially registered under the name Cadabra. Then the choice fell on the largest river on earth as the namesake.
The digital Amazon has swelled since then: the site has now added more than 30 categories.
Some highlights from history:
- In 1996 the now famous affiliate program was added.
- In 1997 Amazon went public. In the course of the dot-com boom, the share initially rose significantly, but was then also punished in the stock market crash. Since then, however, it has been on a steady upward trend.
- In 2000, Amazon opened up to other retailers and launched its marketplace - thanks to a 15% share in every sale, it was very worthwhile. The marketplace now accounts for 40% of shop sales internationally.
- In 2005 “Prime” membership is introduced.
- The Kindle reader came in 2007. It was by far not the first reader of its kind. But thanks to the connection to Amazon, the content problem was solved immediately.
- The first Amazon Echo appears in 2014.
- In 2014, “Prime Now” will also be presented: Anyone who lives in the appropriate region can have certain goods delivered within two hours - for an additional surcharge, even within an hour.
- In 2017, Amazon bought the ailing organic supermarket chain Whole Foods for just under 14 billion US dollars.
Amazon's basic principles
Growth is more important than profit
One of Amazon's core tenets is particularly famous among its investors: Profits are not as important as growth. The following graphic from Recode shows this very clearly:
What happens there? Amazon invests its increasing sales in new ventures. At the same time, competitors are undercut, for whom profits are more important than growth. Nevertheless, Amazon has enough money to buy the organic supermarket chain Whole Foods, for example, because the company has a lot of cash flow.
In the meantime, Amazon is at least making a small profit and is no longer always in the red. It is clear, however, that growth remains a priority. Because, according to Jeff Bezos ’words, it is still“ day 1 ”of the company.
The customers are the most important thing
Ultimately, no investor could complain about the lack of profits, because Jeff Bezos had already clearly announced it in his now famous letter to the shareholders in 1997. So that no one forgets it, this letter is copied again and again at the end of new messages, like here.
Another point is also reflected in this letter: The focus is on the wishes and needs of the customers. This is even referred to as “obsession” in order to avoid any doubts. There it also says:
"Amazon.com uses the Internet to create real value for its customers and, by doing so, hopes to create an enduring franchise, even in established and large markets." - Jeff Bezos 1997
Think long term
The letter also shows that Amazon is not about short-term, but long-term goals - sometimes very long-term goals. In the course of this, it is important to make bold investments. Some of these would pay off, wrote Bezos. One will learn something from the failures.
Even today, more than 20 years later, such a culture of mistakes is certainly still viewed by many as radical.
Agility pays off
Today, Amazon is not only many times larger, but also more complex than it was a few years ago. Nevertheless, the company can react relatively quickly to new developments, as Benedict Evans describes in his article. From his point of view, Amazon consists of two companies: the logistics part and the e-commerce part. Above these two is a radically decentralized organization made up of hundreds of small teams. Jeff Bezos once summarized this principle under the term “two pizza teams”: The teams should be small enough that two pizzas are enough for them as a meal at the end of the day.
These teams use standardized tools and systems for their work. Benedict Evans writes:
“The obvious advantage of a small team is that you can do things quickly within the team, but the structural advantage of them, in Amazon at least (and in theory, at least) is that you can multiply them. You can add new product lines without adding new internal structure or direct reports, and you can add them without meetings and projects and process in the logistics and ecommerce platforms. "
The advantage of small teams is therefore (at least in theory) that they can be multiplied quickly. You can add new product lines without having to set up new internal structures. In principle, Amazon could continue to grow without getting in its own way.
Such small teams initially only get a small budget and a manageable range of tasks. If you prove yourself, you will be given more responsibility, writes Timothy B. Lee.
A disadvantage, according to Benedict Evans, is that everything has to be reduced to the lowest common denominator for this flexible principle to work so seamlessly. Amazon could position itself broadly, but not deeply. I will go into this disadvantage below. Because that gives specialized and smart online shops a chance to hold their own against the giant Amazon.
Shop and marketplace
Of course, Amazon is still an e-commerce offering. However, the success of the marketplace shows why some observers see the company more as a platform provider. After all, Amazon has been open to other retailers and manufacturers since 2000. This goes so far that some startups no longer consider any other third-party sales provider, as the Wyze example shows.
Ultimately, Amazon's website is not just a shop and marketplace, but also a search engine. If you want to buy something, you no longer necessarily look at Google, but at Amazon. In this respect, it is only logical that Amazon now offers an advertising service that is very similar to Google Ads. More on this in another article in this issue. At the same time, of course, Amazon knows a lot about its customers. This includes obvious things like where you live. But a surprising amount can also be derived from the orders themselves, which in turn can be used for targeted advertising.
A concrete example from practice: A manufacturer of low-carbohydrate snacks already knew which other products its potential customers were buying. The company was able to reach precisely these people with its advertising via Amazon and achieved an incredible conversion rate of 20 percent, as the New York Times reports.
In the US, Amazon has now risen to number 3 behind Google and Facebook when it comes to digital advertising. Of course, 4.15% market share still looks modest compared to Google (37.14%) and Facebook (20.57%). But because of its database, Amazon has a real chance to further expand its position here.
An indication: According to a survey by the marketing specialists Catalyst, only 15% of the companies felt that they were already using enough resources on Amazon's ads. 63% said they wanted to increase their investments.
And not only companies that offer products on Amazon have this plan, as the New York Times further reports. Companies like Verizon, AT&T and Geico have also increased their advertising spending on Amazon. At the same time, it's not always just about digital advertising: companies are also experimenting with ads on Amazon packages, among other things. The growth potential seems enormous.
In addition to the target group ready to buy and often accurate targeting, there is another argument for this: brand safety. While platforms like YouTube regularly struggle with scandals, Amazon's website is a comparatively safe and regulated environment.
Own brands like Amazon Basics
Amazon no longer only uses the data from searches, sales and reviews to optimize its own website or to deliver advertising: the shop is increasingly producing its own goods. Products with the “Amazon Basics” logo can be found in more and more categories. For many manufacturers and retailers, it is therefore a queasy feeling to sell or advertise on Amazon: After all, the platform not only earns money, but also learns.
Above all, manufacturers and retailers with cheap, easy-to-manufacture and much sought-after products have to be careful here. Because what globalization enables them is also their Achilles' heel: Amazon can also commission it to do everything right that customers complain about with other offers and undercut them in terms of price due to their sheer size.
But there are not only Amazon basics: The company is also present with its own brands for shoes and clothing, for example. And there it is often not at all visible from the outside that it is an Amazon house brand.
Alexa and Echo
At first, the Echo smart speaker was not taken that seriously. In the meantime, however, he has started an entire device category. Competitors like Google or Apple try to catch up with varying degrees of success.
At the same time, the Alexa voice assistant is not limited to the in-house devices. Amazon offered it as a platform and suddenly it was found in numerous products from a wide variety of providers. The range of functions can also be expanded by anyone interested using “Skills”.
Also read: "Voice search, digital assistants and smart speakers are changing marketing"
Basically, Amazon did with Alexa what Google previously did with Android: It wanted to secure its place on a new platform, so it offered a solution for it free of charge. The search and advertising giant Google is now copying this procedure that it has copied - with a massive investment of money.
However, it is not yet known whether Alexa is worthwhile for Amazon. Only a few users seem to have been shopping through it so far. But as stated above: Amazon thinks long-term. What is still a niche today can become a profitable business in three, five, seven years.
With the Kindle readers plus e-book store, Amazon has turned the field upside down and largely won it over. Especially since a flat rate was introduced with Kindle Unlimited, this has had interesting side effects: A lively scene of independent writers and publishers has emerged here. In Germany, too, some people earn something with it, some can live from it completely.
And even if not everyone wants to buy a device just for reading, the Kindle app is of course present on all major platforms. Attempts were also made to penetrate this market with the “Fire Tablets”. How successful they are is unknown.
An ultimately flopped smartphone also appeared under the “Fire” brand. Amazon probably didn't rely on its own data here when it was developed. And “Fire TV” devices are also part of it, with which you can turn any television into a smart television (which of course then works without any problems with Amazon's offers). They in turn seem popular and successful, as far as can be judged from the outside.
Amazon also likes to buy suitable startups. Blink, Ring or Eero are part of it and they all point in one direction: Smart Home. This is where the Alexa digital assistant and the Echo product family come into play: They act as a central control point and implement commands on demand.
Amazon Prime hodgepodge
Amazon Prime is basically nothing more than a subscription or membership business model: You pay an annual price and have exclusive advantages for it. So you no longer pay extra for a particularly fast delivery. At the same time, Amazon is constantly adding new content and offers. So here you have a Netflix competitor, music streaming and a lot more.
The idea is: something will make you want to become a Prime customer. And then there will be enough offers that you won't unsubscribe anytime soon. This is called platform lock-in: you put yourself in the plush cage of a company.
And it works: According to analysts, more than half of all Internet households in the USA are also Prime members, as the Wall Street Journal reports. Research shows that Prime customers also order more the longer they are members. And why look for alternatives if you've already paid for Amazon's service in advance?
A separate article presents the Amazon Web Services in more detail. They basically started as a side project: Amazon converted its technical infrastructure to a new, more automated, globally positioned and flexible system. At the same time, people thought: Why not offer some of these capacities for money? AWS now contributes around 10 percent of sales and around half of all profits. Many market observers had initially bet that it would be a losing business for Amazon.
While it was initially mainly used by startups, there are now more and more big names among customers - even competitors like Netflix.
Amazon looks at every single part of its business to look for optimization potential. At the same time, the company is also thinking of new platforms that can be offered to others. Logistics is of course part of it: Not only does Amazon now have a breathtaking amount of storage space, it also has its own delivery services from delivery vehicles to cargo planes. With the “Amazon Locker” it has a competitor to the DHL “Packstation” on offer. And with delivery robots, the next long-term bet on the future is already on its way.
In addition, Amazon doesn't just want to use all of this itself. Even today, retailers can finally use the storage space and dispatch via Amazon (Fulfillment by Amazon, called FBA). This allows the company to plan larger projects such as new warehouses right from the start, it earns something from these offers and at the same time the customer experience is better: After all, with "Fulfillment by Amazon" you can rely on getting the same quality as with goods which Amazon itself offers.
As mentioned above, the organic supermarket chain “Whole Foods” with its almost 500 stores has been part of Amazon since 2017. And that's not all: Amazon is planning more stores - both for groceries and other goods. It is already experimenting with bookstores and wants to introduce cash-free stores.
This makes a lot of sense for Amazon, because most retail sales are still made in physical stores. In addition, their customers can be expanded through delivery services. And of course the company can access its treasure trove of data and in turn bring Amazon Prime into play.
None of this is surprising. Amazon wants to do much more than just dominate online retail. And food, for example, accounts for 20 percent of consumer spending, as Ben Thompson explains here.So there is a profitable business area to be found. Why not occupy it and take it to the next level with digital services?
In addition, Amazon could use this food-related system for other purposes and, for example, become a supplier for restaurants, Thompson speculates. Amazon is not about having stores. It is about another platform that can be built on - just like the online shop including marketplace or AWS. Another example of this is possibly the delivery service “Amazon Restaurants”, which can also build on existing structures.
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Despite its impressive size, Amazon still has plenty of growth opportunities, even if it's only about its core business, e-commerce. You can see this in two examples: In the USA, the company controls around half of the e-commerce market. Overall, however, it only accounts for five percent of sales in retail (excluding car dealerships, restaurants and bars). For comparison: Walmart achieved ten percent here. It seems inevitable, however, that retailers in the USA will increasingly migrate to the Internet. In other countries such as China or South Korea, the share of e-commerce is already significantly higher: 23 and 16 percent, compared to 10 percent in the USA. Another number: According to its own statements, Amazon only has a market share of less than one percent of retail sales worldwide.
No wonder that Amazon is one of the many companies that want to develop and use autonomous delivery robots. After all, they could not only change online trading if they enable fast and precise delivery around the clock. They also have the same potential for brick-and-mortar retail: today, delivery on demand only makes sense for a few goods, such as food delivery services. With autonomous fleets of delivery robots, this could also apply to other purchases.
But of course Amazon does not automatically fly customers to Amazon, as is shown in China. The otherwise seemingly overpowering company doesn't have much to report here.
But that doesn't stop it from advancing into many other areas. Artificial intelligence is one of them, but also augmented and virtual reality. If you want to know more about it, we recommend this very detailed overview in English.
Criticism and stumbling blocks
But even at Amazon, not everything is perfect. Amazon's website and marketplace, for example, have long been considered a role model and a reason for the company's success. The web presence today is better than a deterrent example. Dozens of ugly elements vie for the user's attention here, a hidden object in which it is difficult to find what one is looking for. Products and product variants can be found scattered across several offer pages. The search is often difficult to narrow down. Comparisons are only possible with great effort.
In Germany it may (still) be different. I am reporting on my experiences with Amazon in the USA and am not alone with it: Katie Notopoulos describes it at BuzzFeed, Ian Bogost describes similar frustration at the Atlantic.
Amazon also has a problem with fakes or simply fraudsters. They now want to counteract this more strongly. But whether that is more than lip service remains to be seen.
And last but not least, the fake reviews business is flourishing.
In other words: On the one hand, it is becoming more and more difficult to find exactly what you are looking for. And even if you find it, you can't rely on what you really get in the end. And that's a problem that Amazon seems to be neglecting, or in any case has long neglected.
Instead, the focus is on selling the paid Prime membership. Sometimes popular products can only be ordered by members. For me personally, that was the point at which I looked around for alternatives and only order from Amazon if it is actually the best option. Thanks to Amazon's sales tactics, for example, I became aware of B&H here in the USA: a very sympathetic company based in New York, where I now buy everything that has to do with photos, videos, computers and other electronics.
And that shows at the same time: Even if Amazon appears huge and overwhelming, other online retailers still have a chance. Just as B&H serves a clearly defined target group, so can others. Good and as personal service as possible is of course part of it, as well as a well-made website with useful content. One example in Germany is Thomann: a clear niche, helpful information on the website, personal contacts, good prices with prompt delivery. And of course, it is much easier for a specialized online shop to prepare its product categories in a meaningful and target-group-oriented manner than a provider like Amazon, where one system should map everything.
In addition, Amazon keeps making headlines for not seeing ethical business practices as a priority. Just think of the minimal pay of many employees, while Jeff Bezos is putting his billions in rockets in front of everyone. The scramble over the location of the second Amazon headquarters in the USA also made some not particularly friendly headlines. Cities and regions outperformed and undercut each other in this spectacle.
Meanwhile, Amazon pays no US federal taxes on its $ 11.2 billion profit from 2018. Of course, neither do they have to. One can take the position that it would be the task of the legislature to close appropriate loopholes. Or, on the other hand, one could expect a company to voluntarily give something back to society without which it would never have been possible. Instead, Amazon, for example, has put its home location Seattle under massive pressure to prevent an additional tax - successfully. The money from this should be used, among other things, against the growing problem of homelessness. At the same time, Jeff Bezos is extremely stingy when it comes to charity.
The list goes on. Unfortunately, like so many companies, Amazon is primarily interested in its own growth and not much else - unless you can knit a good press release out of it. It would go beyond the scope of this article to deal exhaustively with this topic.
Amazon is a remarkable company. And you certainly have to have a lot of respect for Jeff Bezos - at least when it comes to his business acumen. It is amazing how consistently the company continues to pursue what it described in its 1997 letter to the shareholders. And it is also amazing how radical many of the ideas and principles still work, on the basis of which Amazon has become so successful.
This article belongs to: UPLOAD Magazine 69
Along with Facebook and Google, Amazon is one of the companies that shape and help shape the Internet, at least in many Western countries. In this new edition, we take a look at how Amazon got so powerful. We explain how you can achieve top positions with your products in the marketplace. We give you tips on efficient advertising campaigns. And we explain what the Amazon Web Services are all about. Bonus Articles: How To Avoid Affiliate Marketing Scams.
Jan "jati" Tißler has over 20 years of professional experience as an online journalist and digital publicist. In 2006 he launched the UPLOAD magazine. Since 2015 he has been helping companies to inspire the right customers with content. Together with Falk Hedemann, he offers UPLOAD Publishing services along the entire content marketing process chain. Born in Hamburg, he lives in Santa Fe, New Mexico.
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