Thursday, July 12, 2012

The Amazon Economy

Excellent feature in FT that explores Amazon's expanding sphere of influence in the e-commerce space. In recent years, Amazon has been transformed from being a mere online book retailer into a provider of the IT and even physical plumbing for e-commerce firms,
Mr Bezos is turning Amazon into a back office infrastructure provider that sells access to a digital market place with millions of customers, to petabytes of server space and to state-of-the-art warehouse facilities serving myriad forms of commerce... its shift into infrastructure is extending its power as a disruptive force to how business is structured. It is revolutionising the way entrepreneurs can create start ups, or revive staid companies, by letting them plug their ideas into pay-as-you-go systems that cost a fraction of the investment they would need to build such infrastructure alone...

Its services have already produced hybrid businesses where Amazon runs marketing, customer relationships, payments, computing, logistics and distribution, leaving executives to do nothing but find or make good products, both physical and digital... Amazon charges clients a pay-as-you-go fee for access to a flexible portion of cloud space where they can manage data and run their websites, making it easier to cope with demand spikes and reducing the need for in-house servers and technicians.
In simple terms, Amazon is leveraging its e-commerce expertise and physical infrastructure to position itself as an e-commerce meta-service provider. Amazon is tapping into the market for supply of outsourced services for e-commerce firms. Alternatively, as FT writes, Amazon's business model seeks to "unbundle" the corporation - let companies shed supposedly “core” processes that conventional wisdom says should be combined within a single entity. Instead of selling products, Amazon is seeking to sell services.

Interestingly, Amazon is also a competitor to many firms which use Amazon's e-commerce service platforms. For example, Amazon Web Services (AWS) is a cloud computing business, which is the engine behind digital content companies including Spotify, a digital music service, and Netflix, a video streaming service. But Spotify and Netflix also compete against Amazon’s Cloud Player and Instant Video services respectively.

Amazon's forays into providing back-end services has to be seen in the backdrop of its failure to make attractive profits from front-end retailing. It made a meagre $631m net profit on revenue of $48bn last year, and had an operating margin a mere 1.5% in the past quarter. It feels that it is more profitable to earn service fees than to buy and sell products itself. It feels a great opportunity to make money from its huge investments in warehouses and data centers.

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