🎯 How AWS turned costs into profits

A masterclass in lateral-thinking

Read time: 2 minutes 24 seconds

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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:

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

[18 minute read]

Ex-Amazon Google engineer Steve Yegge’s infamous rant comparing the 2 companies, in particular the platform/accessibility choices behind the Google+ product.

The best part - Yegge accidentally made the internal Google memo public on Google+, garnering massive media attention.

A mandatory read for tech historians.

[3 minute read]

Amazon bet the house on an architecture transformation.

“If it worked, infra costs would go down by 80%+. If it failed, the website would fall over and the company would die.”

Makes switching calendar apps feel a little less daunting.

[4 minute read]

This one’s for the visual learners.

Cost structure, growth, margins, geo segmentation, and competitive analysis - a 360° visual breakdown of the AWS business line.

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