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How AWS turned costs into profits

Chess Move

The what: A TLDR explanation of the strategy

At a now-legendary executive retreat at Jeff Bezos’ house in 2003, Amazon leadership ran an exercise that changed the course of history forever.

The exercise started with a discussion about Amazon's core competencies:

→ Offering a broad selection of products? Check.

→ Fulfilling and shipping orders? Nailing it.

A few rotations later, they discussed IT.

As a rapidly scaling low-margin retail business, they had been forced to become market leaders at running reliable and cost-effective state-of-the-art data centres.

This little nugget presented an opportunity:

“In 1900, a business had to build a generator to open a shop, so why should a business in 2000 have to build its own datacenter?”

Amazon folded its highly-desirable architecture inside-out, offering compute, databases, and storage to the market under the banner ‘Amazon Web Services’.

Today AWS services 41.5% (!!) of all web application workloads.

History’s best example of ‘platformisation’.

Breakdown

The how: The strategic playbook boiled down to 3x key takeaways

1: The AWS playbook: Turn costs → profits

Infrastructure → AWS

Payments → Amazon Pay

Marketing → Amazon Prime

Sales → Amazon Associates

Fulfilment → Fulfilment by Amazon

Product → Kindle, Basics, Fire, Echo, etc.

AWS kickstarted Amazon’s meta-strategy for new business lines: Transforming cost centres into profit centres.

2: Dogfooding done right

AWS became the infrastructure service provider to the Amazon.com retail store.

They made a point of treating Amazon.com no differently than any outside user.

This gave them the requirements, testing, and short feedback-loop they needed to develop fit-for-purpose services for the market’s largest customers.

3: Left hand feeding the right

Amazon.com’s flywheel can be summarised as: lower prices → increased sales → economies of scale → lower prices.

Despite pulling in a whopping 43% of $AMZN’s revenue, Amazon.com has razer-thin margins with high logistics and labor costs.

AWS however accounts for just 13% of $AMZN’s revenue, while clocking in nearly 75% of the company’s operating profit.

The takeaway?

AWS is the cash engine that subsidises Amazon.com’s impossibly low prices.

Rabbit Hole

The where: 3x high-signal resources to learn more

Recommendations, friends, and sponsors

MoveMeOn - Founded by McKinsey alumni, MoveMeOn is a platform for hiring ex-MBB and strategy talent, worldwide. Try the digital headhunter for permanent hires + freelance experts today.

Just Go Grind - 3k-7k words on the stories of the world’s best founders, every week. Check out our friend Justin Gordon’s one-of-a-kind research essays here (1-click to sign up).

In Defense of Strategy - Our favourite read this week. “Every startup has a window of time during which they must simultaneously build something worth defending and build defenses around it. For new startups, strategy is deciding how to use the window wisely.”