On Thursday Amazon reported their latest earnings sending the stock to all-time highs after beating analyst estimates for both revenue and profit. But what looks like unstoppable dominance today is instead a decade of investing and execution.
“Since 2011, we have invested over $150 billion worldwide in our fulfillment networks, transportation capabilities, and technology infrastructure, including AWS data centers.”
– Jeff Bezos, CEO of Amazon
The $150 billion spent during the last 7 years is the reason why the competition is unable to make a dent in Amazon’s growth. One of the biggest areas of that spending was Fulfillment by Amazon (FBA). Launched in 2006 it is now used by two thirds of the top Amazon.com sellers, and combined with Prime it forms a virtuous cycle of convenience for consumers.
In 2011 Q1 the company’s sales were $9.8 billion, now up to $51 billion in 2018 Q1.
At the time marketplace sellers accounted for 33% of units sold, now up to 52%. A new record. A decade ago Amazon made a bet that Prime memberships, fulfillment infrastructure, and third-party marketplace are going to be key. The Prime memberships grew because third-party sellers added Prime-enabled inventory using FBA. And thus third-party sales share increased.
The underlying idea behind this is that US e-commerce is driven by convenience. Brick-and-mortar stores were good enough for most consumers, unlike in countries like China. To enable convenience fast and reliable shipping is key, something Amazon decided it can only guarantee by owning the infrastructure. Now having attracted 100 million Prime members worldwide, all of which are used to the convenience, it made the competition struggle since they don’t have comparable infrastructure.
Only 53% of Amazon’s sales this past quarter came from the online sales of products. The other 47% come from services like advertising, marketplace, fulfillment (FBA), cloud hosting (AWS), Prime memberships, etc. Amazon continues to drift away from being a retailer to a platform for selling. A strategy which is not only more scalable, but also increasingly more profitable.
Two years ago in 2016 Amazon’s own sales contributed 68% of the total. A year later in 2017 it was down to 64%. Now down to 53% it will only take another year for the company to be - by definition - not a retailer, with more than half of the revenue coming from services. In the most recent quarter Amazon’s online sales, also known as first-party sales or 1P, grew 13%, compared to the 39% growth of third-party seller services, 56% growth of Prime memberships, 49% of AWS, and 132% of Other, which is predominantly advertising.
The 132% growth of the advertising revenue is worth a highlight of its own. Some estimates put the Amazon advertising business at $20 billion by 2020, some at $50 billion in ten years. The advertising business will not only prove to be very profitable for the company, but also the key battleground for the future of retail. As Amazon continues to grow in market share, the importance of sophisticated advertising will only get greater.
The company to challenge Amazon is not going to be Walmart or eBay. Instead it will be someone willing to spend $10-20 billion a year for a decade or more. All while being unprofitable year after year, hoping investors see the big-picture long-term vision. This is what Amazon did, and it won’t be undone by anything less.