Amazon.com - Research Report - Part 2
A deep dive into Amazon's competitive advantage and management team
âTo be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online.â
This research report is divided into three sections. This is Part 2 of 3. In this segment, we will explore:
The competitive advantage
Amazonâs different moats
Risks
The management
Founder and CEO
Incentives & Skin in the game
In our research reports, an overview and an analysis of the business model usually appear first. The basis of many businesses is their business model. The business model of Amazon is clearly protected by a large moat. Thus, our study focuses especially on Amazon's culture, which is the basis of this moat. Countless Amazon goods and services have emerged from this culture. The skill is knowing why Amazon succeeds, how this strategy will continue to work, and how to invest wisely in Amazon.
4) The competitive advantage
As explained in Part 1 of the Amazon.com analysis, Amazon has a highly ingrained culture of coming up with new ideas. It's hard to value this moat because it's not a typical one, but it is very important. Almost all of the classic moats are also there to protect Amazon. Here are some details about the standard moats.
3.1 Brand Recognition
Visual Capitalist says that Amazon is the world's most expensive brand, worth $299 billion. With a brand worth of $276 billion, Amazon comes in third, according to Interbrand. To put it another way, Amazon has become a huge brand. Amazon can spread because of this and other things. Think about it: Would you buy an HP e-reader? Most likely not. People don't think of HP as a company that comes up with new ideas. For now, everyone thinks it's fine that Amazon is making an e-reader. Amazon is known for quality and new ideas. Amazon can use that in any business they want.
Amazon is a strong name, but so are Kindle, AWS, and Prime Video. One thing that makes AWS different from other cloud players is that they have never changed their strategy. This builds trust in AWS. But a lot of businesses already work with Microsoft, so Microsoft Azure might be the better choice now.
3.2 Network effects
When the number of people who use a product or service grows, so does its value. This is called a network effect. There are a lot of network effects at Amazon.
To begin with, Amazon.com. This has a network effect that works both ways: more customers make the platform more appealing to providers, and more offerings make the platform more appealing to customers. Chapter 2 also talks about how Amazon sellers can't switch platforms and still sell the same number of items. The platform that gets the most visitors is the one that has the most power. They can raise prices for third-party sellers because of this. There are also more and better reviews on Amazon than on other online stores because it has more customers. In the past, this has been one of Amazon's strong points.
Amazon.com has a strong network effect, and so does Amazon Prime. The Prime Video content gets better as more people sign up for Prime. But making new content costs a lot of money, which slows down the network effect. This is why Amazon is still losing money on Prime Video. This also includes the benefits of fast delivery for Prime members. The distribution network gets faster and more efficient as more people order from Amazon.
3.3 Shared economies of scale
Customers benefit from shared economies of scale, which are a mix of network effects and economies of scale. This is done so that customers can get better service or lower prices. This was talked about in Chapter 2, but it's so important that it needs to be said again. This works like this at Amazon.com: There are more sellers on Amazon.com when more people use it, which makes the shopping experience better for everyone. This makes the business bigger, which lowers costs. This lets Amazon lower prices, which makes the customer experience even better.
Sharing economies of scale is something that Amazon does with both Amazon Prime and AWS, as well as its e-commerce platform. Even though AWS costs more than Amazon Prime, it's still impressive that the same company uses shared economies of scale three times. For Amazon Prime, the more members there are, the lower the prices are, the more money is spent on Prime Video and fast shipping, and Prime members get more content and benefits.
The more people who use AWS, the less it costs to run and the less it costs to buy. As an example, AWS has cut its prices 76 times since 2006.
3.4 Lowest costs
âI very frequently get the question: 'What's going to change in the next 10 years?' And that is a very interesting question; it's a very common one. I almost never get the question: 'What's not going to change in the next 10 years?' And I submit to you that that second question is actually the more important of the twoâbecause you can build a business strategy around things that are stable in time. In our retail business, we know that customers want low prices, and I know that's going to be true 10 years from now.â - Jeff Bzos
Shared economies of scale (Chapter 3.3) talks about how Amazon gives customers the economies of scale in the form of low prices. It's almost impossible for competitors to be cheaper than Amazon for a long time now that Amazon has grown that big.A competitor can, of course, be cheaper for a short time. It is hard to keep up this level of activity for a long time and still make money, though. Temu, a company from China, is trying to take market share from Amazon by being less expensive. It's important to keep an eye on this development, but Temu doesn't seem to be able to compete with Amazon's service right now. If your services are cheaper than those of your competitors, it's hard for them to stay in business. More so in a market where businesses sell to consumers.
3.5 High switching costs
It's not hard for customers to switch online stores. It is a lot harder for a business to switch from AWS to Microsoft Azure, for example. The exact costs depend on the kind and amount of data that needs to be sent, but it takes months and costs tens of thousands of euros. It will take some time for a management team to decide whether to switch from AWS to Azure. More and more often, multi-cloud and SOA from two providers are used. This makes sense because it means a business isn't tied to just one provider. It is a safe and smart choice from a management point of view. That being said, the biggest problem with this is that the software engineers don't get the most out of how the different AWS and Azure services work together.
The world won't switch to the cloud in a few years either because it costs a lot to do so. Moving from physical IT infrastructure to the cloud can take up to 18 months, as explained in Chapter 2. This is true even though AWS comes with a truck full of data transporters, which are also known as "snowballs."
3.6 High barrier to entry
This is the world's fastest delivery network. It's now bigger than FedEx and UBS. In 2019, Amazon spent $12 billion on capital expenditures. Every year since 2021, it has spent at least $48 billion. A lot of this money doesn't go to building distribution centers; some of it goes to things like AWS data centers. However, it does show how much Amazon cares about their customers. It seems like these numbers say it all. There is no way a competitor could pass Amazon in the next 20 years unless there is a huge change in how things are transported.
3.7 Patents
In 2023, Amazon will also have 1,857 patents, which is another traditional moat. That's more than Oracle and Boeing put together, for reference. This makes Amazon's moat stronger, but it's not what will make or break Amazon's business. You don't want to think about this as an investor.
3.8 Risks
It looks like Amazon has a big moat. And, of course, Amazon's moat is also checked every day. In this business world, everyone wants a piece of their pie. I see the following six as the biggest threats to Amazon's moat(s):
Multi-cloud
Companies no longer want to be tied to just one cloud provider. Because of this trend, Microsoft Azure and Google Cloud are taking market share away from AWS.Microsoft Azure
In the last five years, Azure has grown faster than AWS. Since they had to come from farther away, it's not a big surprise. Even though Microsoft doesn't say how much money Azure makes, AWS makes more money than Azure does. Microsoft has an advantage because it is already used by a lot of businesses and is trusted by big businesses. Not yet, there are clear signs that show which cloud provider has the best service. Anyone who owns Amazon shares should keep a close eye on this to see if the mood changes.Company culture
As explained in Chapter 1, Amazon's current and future success will depend on its culture of innovation. You should keep a close eye on this in case it changes. This is something that Amazon seems to know since they laid off a lot of people in 2022.Temu, Shein, Shopify
A lot of other online stores are trying to take market share from Amazon. You should always keep a close eye on the competition, even though Amazon has a big moat. Shopify, for instance, had plans to open their own distribution centers. These plans are no longer going to happen. If you are an investor in Amazon, you should keep an eye on these kinds of events and figure out how much of a threat they are to the company.Change in consumer behavior
Amazon is a big, big company that stands for big business. If people around the world start shopping at small, local, and environmentally friendly businesses instead of Amazon, this could hurt the company. People will have a terrible time if they stop ordering from Amazon. Putting so much money into distribution centers makes the moat stronger, but Amazon loses a lot of money when they aren't running at full speed. It might seem impossible, but a similar change is needed to bring down a giant like Amazon.
Regulation
The US government also knows how big Amazon is and might be afraid of a monopoly. Ever since a few years ago, things have been pretty quiet, but Amazon might have to split up. The news will talk a lot about this if it happens, so you don't need to do much research on it yourself. It could be bad for Amazon because if it splits, it won't be able to get as many economies of scale and will have less information about its customers. However, a better case scenario is also possible. It's possible that value will show up that investors didn't see before. If Amazon ever goes out of business and the price drops after this news, you should keep a close eye on the valuation and take advantage of any chances that come up.
4) Management
We talked in depth about Amazon's culture in Part 1 of our analysis. You can learn more about how management works by looking into Amazon's culture. This chapter talks about CEO Andy Jassy and founder Jeff Bezos for a short time. Of course, incentives and having "skin in the game" are also taken into account.
4.1 Jeff Bezos & Andy Jassy
Jeff Bezos - Executive Chair
Jeff Bezos, who is 60 years old, started Amazon in 1994 and is responsible for its success and culture of coming up with new ideas. The full life story of Jeff Bezos is too long for this analysis. Tip: Read The Everything Store or listen to the required podcast about Amazon.com to learn more about Jeff Bezos and how he started Amazon. Thank you for telling me that Jeff Bezos quit as CEO of Amazon in 2021. He is still on the board and works closely with Amazon.
Andy Jassy - CEO
In 2021, Andy Jassy, who is 56 years old, took over as CEO of Amazon from Jeff Bezos. He has worked there since 1997. Jassy has big shoes to fill. Even though Amazon had a rough year in 2022, it doesn't look like it made any big mistakes during that year, and in 2023, Amazon rose to the top. Andy Jassy helped to create AWS and ran the company as CEO from 2016 to 2021.
In 2001, Andy Jassy could have been fired because everyone in the marketing department where he worked was let go. He liked Andy Jassy, though. That's how Andy Jassy became "Jeff's Shadow," Jeff Bezos' tech assistant.
4.2 Incentives & skin in the game
âShow me the incentive, and Iâll show you the outcomeâ - Charlie Munger
Jeff Bezos said in the first letter to shareholders that executive pay plans are very important to Amazon's long-term success. Amazon's approach to executive pay is more extreme and different from that of other publicly traded companies.
Amazon wants its executive pay plan to encourage strategic thinking, new ideas, and reinventing itself while also offering fair pay that attracts and keeps top talent. That's why Amazon managers are almost always rewarded with stock, and there is only one way to measure performance: the price of the stock over the last three years.
Because Amazon would only reward managers based on certain performance criteria, like how much the e-commerce platform grew, managers would never be motivated to think outside the box. If that had been the case, there would be no AWS, Kindle, or Amazon Prime.
They don't give cash bonuses, they don't have short-term goals, and they pay their managers very little. Amazon says that base salaries are meant to cover basic needs and living costs. For instance, CEO Andy Jassy only gets $175,000 in cash. On the other hand, Andy Jassy got a share package with a 10-year waiting period when he became CEO in 2021. This pay is subject to change and is equal to $211 million over 10 years (based on the price in 2022). This meant that 99.5% of Andy Jassy's pay for 2021 was in danger.
As of this writing, Jeff Bezos still owns 12.3% of all Amazon shares. Andy Jassy had shares worth more than $345 million in February 2023. This number will only go up in the years to come, as you can see above.
That being said, it's safe to say that management's goals are very much in line with those of long-term shareholders. The problem with this very high pay structure is that it leads to dilution when shares are issued.
Part 3 of 3 is coming soon!
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