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- 🎯 How AWS turned costs into profits
🎯 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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