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How Jeff Bezos made Amazon a $1.6 Trillion company? | Business Model of Amazon | Dhruv Rathee - YouTube
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Hello, friends!
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In the year 1994,
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Jeff Bezos left his cushy investment banking job,
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to work on his startup.
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Internet was blowing up at the time.
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So he got the idea
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of doing something internet-related.
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Of creating an online store,
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to sell books!
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What should he call this online store?
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He thinks of the name
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Cadabra.
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From Abra-Cadabra.
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This name was so weird that
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when he started using this name,
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his lawyers questioned the name.
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When they called up customers,
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the customers often didn't recognise or understand the name of the company.
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They tell him that the name has to be changed.
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So Jeff Bezos started thinking about other names.
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He registered several domain names.
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Because it was supposed to be an online bookstore, he thought of BookMall.
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In fact, this is a domain name that
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still redirects to amazon.com
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when you type in this website on your browser.
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He finally settled on the name Amazon,
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because Amazon is the largest rainforest in the world.
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And the Amazon River is the largest river in the world.
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He wanted the Amazon company he built,
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to be the largest bookstore in the world.
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Interestingly,
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if we fast forward to 25 years into the future,
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today, Amazon is not only the largest bookstore in the world,
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but also is the largest online store for buying just about anything.
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And Amazon Prime video,
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is one of the largest OTT platforms.
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Amazon Web Services is number 1 in its field.
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Amazon Alexa, Amazon Kindle,
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Amazon Drive, Amazon Music,
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Amazon's Audible, Amazon Pay,
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Amazon has even started delivering groceries in some countries,
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under the name Amazon Fresh.
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At one point, Amazon had tried to launch their phone,
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called Amazon Fire.
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Though that turned out to be a flop idea.
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But today, Amazon has become so successful
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not only as an online store,
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rather as a company spread over soo many sectors.
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How was it possible?
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What is the Business Model of Amazon?
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Come, let's understand in today's video.
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"Jeff Bezos has become the first human being on the planet
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to be worth $200 billion."
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"I was a good student.
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I always worked really hard.
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I was nerdy.
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It doesn't matter to me whether we're a pure internet play
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what matter's to me is do we provide the best customer service?"
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The idea of Amazon was quite simple right from the start.
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But it was a unique idea for its time.
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To create an online bookstore.
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At the time, people had to go to physical bookstores to buy books.
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Why not let people buy books online
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through a website on the internet?
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Initially, Amazon's website was a mere bookselling website.
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The advantage of selling books online was that
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customers could access thousands of books on a single website.
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A very basic, practical, and convenient idea.
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One that people needed.
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Right from the beginning, even as a startup,
Amazon was a successful company.
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The website was launched in 1995.
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And by December 1996,
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they had amassed a customer base of 180,000.
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Their website looked like this then.
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By 1997,
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their revenue had reached $148 million.
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At this point in time,
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Jeff decided that he didn't want Amazon to remain a private company
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instead, he wanted to list it as a public company in the stock market.
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So that the company could access more funds to grow.
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In 1997,
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Amazon became a public company.
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And by 1998,
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Amazon's revenue had reached $600 million.
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There are said to be 2 main reasons behind Amazon's success.
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First, Amazon was offering a huge convenience to the customers.
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And at the time, there were next to no companies
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that was offering the same service as a competitor.
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And the second is something that's called
the Flywheel Effect.
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A flywheel is basically a spinning wheel,
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it keeps spinning evenly even when faced with changes in external conditions.
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Amazon's business model had become like a flywheel by then.
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They sold books at lower prices,
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and millions of books were available in their online store,
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so the customers had a positive experience,
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since the customers were happy,
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it drew more customers to their website,
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and because more customers were joining their website,
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the sellers of the books,
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especially the third-party commission-based sellers,
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wanted to join Amazon to sell their books.
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Because they could see the large number of customers it had.
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So more and more sellers listed their books on Amazon,
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leading to more options of books to buy on Amazon for the customers.
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It had become a wheel
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that was being pushed in the same direction twice,
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increasing the rotational speed.
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When Amazon earned more profits,
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Amazon used that money to improve their website
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and to improve the customer experience
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as well as in keeping the costs low.
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Because this was a game of low costs.
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When books were being sold at low prices,
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more customers and sellers would use their services.
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And thus a nice business model was created.
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In 1998, Bezos thought
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of using the same strategy to sell not only books,
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but to sell computer games and music also.
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In 1998, Amazon expanded their business,
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in addition to books, they were also selling computer games and music on their website.
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It saw unprecedented success.
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To such an extent that in 1999,
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Time magazine's Person of the Year
was Jeff Bezos.
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His photo was printed on the front page.
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With time, Amazon adopted many ideas, big and small.
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Driving forward the growth of the company.
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One of these ideas was,
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the 1-Click button.
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When you shop on Amazon, you would've seen,
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there's an option "Add to Cart"
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and below it, there's the option
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Buy Now with 1-Click.
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With one button, you can buy the products and get them delivered.
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Many people use this 1-Click button
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and often end up buying things
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that they truly don't need.
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This button was a great idea on its own.
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And it was so successful
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that in September 1999,
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Bezos got this technology patented.
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There were 2 uses of this seemingly simple button.
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The first and quite obvious is that
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customers can buy things much more easily.
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It greatly improves the convenience of the customers.
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And the second and hidden benefit of this was that
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when people use this button,
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they need to save all their information first.
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Their personal information.
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Name, contact details, payment details, billing address.
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Only then can you use this button.
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Amazon started tracking it.
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When people used this button,
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Amazon tracked what they bought.
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And based on that, Amazon started sending out suggestions
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"If this person bought this,
they would like this too."
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With this, they started putting up ads for the customers
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according to their buying preferences.
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With the help of these targetted ads,
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it became easier for Amazon to sell products.
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And their sales grew exponentially.
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If you have to click on multiple buttons to buy something,
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it gives you the time to think.
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Do I really need it?
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Should I buy it?
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But if one click of a button, you get to buy something,
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you wouldn't even get the time to think.
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So the sales of Amazon grew even more.
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Several companies tried to copy this idea.
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There's a company called Barnes & Noble,
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they tried to incorporate a one-click button too,
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but since Amazon held the patent, they lost the lawsuit.
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And Amazon was the only one that could use this.
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Amazon had a huge advantage because of this.
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But fortunately, for the other companies,
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this patent expired in 2017.
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And presently, any company can use it.
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For starting any type of a business or job,
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you need creativity and innovation
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but before that
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you need to have the basic skills in your field.
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How Jeff Bezos had the knowledge of computer science beforehand.
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It was his field of study.
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While working at the investment bank,
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he had an idea of the potential of the internet.
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In his job, he was assessing the growth of the internet,
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and whether they should be investing in internet-based companies or not.
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Similarly, if you want to be successful in any field,
[465]
you would need to have the basic skills.
[467]
And for learning skills,
[469]
other than formal education and training,
[470]
the best way is to learn through Skillshare.
[473]
Skillshare is an online learning community
[475]
on which you'll find thousands of classes on many topics.
[478]
Whether it's gardening,
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video editing, do-it-yourself decor,
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cooking, finance, productivity,
[484]
any skill you can think of,
you can learn on Skillshare,
[487]
All these classes,
[488]
are curated by industry leaders and experts in the field.
[492]
I use Skillshare to improve my skills
[496]
like productivity and time management.
[498]
These are something that I learned through Skillshare.
[501]
Such as Nathaniel Drew's Creativity Unleashed class that I'm taking now.
[505]
There are many classes by Indian creators too.
[507]
Like Alicia Souza's Illustration class.
[510]
Ekta Chaudhary's gardening class.
[512]
All these classes are ad-free.
[514]
You can easily focus here without interruptions.
[517]
And the best thing is that,
[518]
you can get unlimited access to their entire library,
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at a very affordable cost,
[523]
the annual subscription costs
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less than ₹2,000.
[526]
It means approximately ₹166 per month.
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You would've paid more for the food you ordered last night.
[533]
And because Skillshare has sponsored this video,
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the first 1,000 people among you,
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to click on the link given in the description,
[539]
will get a 1-month free trial.
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Go explore!
[542]
And now let's return to the topic.
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In 2000, the Amazon Marketplace was launched.
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Jeff didn't want to be limited to books and games.
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He wanted everything to be sold on Amazon.
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Through this Marketplace,
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any third-party vendor could sell anything on Amazon.
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The benefit was that
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Amazon would take a portion of the sales as its cut,
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of anything sold.
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And this was huge.
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Because normally, if Amazon had to sell something
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suppose, Amazon wanted to sell tables and chairs.
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Amazon would have to have a warehouse
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for making and storing the tables and chairs.
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But here, a third party was making the tables and chairs
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and was selling through Amazon.
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So Amazon didn't need any storage space.
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It didn't need to build its warehouse.
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This became an important source of revenue for the company.
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Amazon was growing so fast
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with so many new customers and vendors joining them,
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that they faced a shortage of data storage.
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Jeff then decided
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to invest more in technology
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and to create their own data storage facility.
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Rather than using someone else's storage facilities.
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Friends, this was the birth of AWS.
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Amazon Web Services.
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Again, this was another field,
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that didn't have much competition.
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Not many companies were doing this.
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And this business was so successful for Amazon,
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that currently, this is the highest profitable business
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that Amazon is involved in.
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40% of the profitability of Amazon is from AWS.
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Amazon Web Services.
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Most of the top companies in the world who have an online presence,
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Netflix, Pinterest, Twitch,
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LinkedIn, Facebook,
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use Amazon Web Services
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to store their data.
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In 2007, Jeff Bezos executed another horizontal expansion of Amazon,
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with the launch of Kindle.
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An e-Reader.
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Since Amazon had begun as an online bookstore,
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launching an e-Reader,
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so that books could now be read digitally as well as physically,
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was a related expansion.
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Interestingly,
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Jeff Bezos decided that Kindle would be a Zero-Profit device.
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The cost incurred in making the device,
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would be the only amount recovered from the buyers
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and Amazon would earn zero profit from selling Kindle.
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You would be surprised to know this,
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you might wonder how it could be possible.
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The simple reason for this was
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the books that could be read on Kindle
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had to be bought on Amazon's bookstore.
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Though Amazon wouldn't earn anything from Kindle,
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Amazon would make money by selling the books.
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This business strategy was very successful too.
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With this Kindle could become a very low-cost device.
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Many people started buying it,
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and today, Kindle is the world's number 1 e-Book reader.
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Friends, you might have noticed one thing,
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so far in the story,
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the areas that Amazon was successful in,
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in most of the areas, Amazon was the first company,
[710]
to properly get into the business.
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To capture the market.
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There was a significant First Mover Advantage
[717]
that Amazon exploited time and again.
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For example, it was the first to come up with the idea of an online bookstore.
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To become successful with the first-mover advantage
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becomes very easy.
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Although, one has to work really hard to maintain it later on.
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Like how Amazon had patented the new technologies
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and kept innovating rapidly,
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so that Amazon could maintain that advantage.
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And it could defeat the competitors that cropped up later.
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In the areas that Amazon could not get the first-mover advantage,
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where there was a tough competition already,
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Amazon's failures were highlighted there.
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Such as Amazon's Fire phone.
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When Amazon tried to launch its smartphone,
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in 2014.
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But 2014 was already quite late
[759]
to launch a smartphone.
[760]
The first iPhone was launched in 2007.
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And Android was launched a few years later.
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By 2014,
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there was tough competition between Apple and Android.
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Both companies were innovating continuously
[773]
and bringing in new technologies.
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In this case, when Amazon came up with its smartphone,
[778]
it was very difficult for Amazon
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to compete with the experienced players.
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That's why Amazon's Fire phone
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was a huge failure.
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But on the other hand, for e-Readers, Amazon was one of the first companies
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to make e-Readers.
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They made a good quality product
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at a low cost and with zero profits,
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so Amazon is the Number 1 for e-Readers.
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A similar thing was seen
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in the Indian market.
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In Amazon's business field,
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Flipkart was launched in 2007.
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Amazon hadn't entered the Indian market in 2007.
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Flipkart got the first-mover advantage here.
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And this advantage remained for years.
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In 2013,
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Amazon entered India with Amazon India.
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But because of Flipkart's advantage,
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even now,
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Flipkart is giving strong competition to Amazon.
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The two companies have an almost Duopoly
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in the eCommerce market.
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A monopoly is when one company rules the market,
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A duopoly is when two companies rule.
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Each of the two companies has a market share of around 30%,
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and all the other companies share the remaining part.
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If we look at the data from Financial Year 2020,
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the number of users of Flipkart is more than three times
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of that of Amazon India.
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And the revenue earned by Flipkart
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is more than thrice of that of Amazon India.
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The simple reason behind this is that
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Amazon is spending a lot of money in the Indian market
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so that it could increase its market share.
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So it is willing to work at a low profit too.
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It is sacrificing a part of its profit to build a better market share.
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Because as we can see,
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the company that can get the biggest share of the market,
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gets this Flywheel advantage.
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There'd be more customers and more sellers.
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So it is very important to do this.
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To be successful in this market.
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So even if one doesn't earn as much profit in the beginning
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it's alright.
[885]
When Flipkart got its advantage
[887]
they made full use of it by quickly diversifying.
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Presently, Myntra is owned by Flipkart,
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Flipkart Wholesale, Flipkart Health+,
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Cleatrip, Shopsy,
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and even the payment app PhonePe.
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Flipkart has a majority stake in it.
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Similar to the horizontal expansion of Amazon in the USA and other countries,
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of its business areas,
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Flipkart did the same thing in India.
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But overall, the growth of Amazon,
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has still been exponential across the world.
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You can see it on this chart,
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their revenue growth in the last 20 years.
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From 2005 to 2021,
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they have crossed a quarterly revenue of $100 billion
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and this chart is rising exponentially.
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Due to the coronavirus pandemic,
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it increased further,
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because everything was closed during the lockdown,
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so everyone was ordering goods on Amazon,
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while other shops were closed.
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Amazon got a huge advantage from it.
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Due to this, Jeff Bezos became the richest man in the world.
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Amazon's eCommerce business
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can be divided into 2 models.
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1P and 3P.
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1P means that Amazon buys a product
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stores it in its warehouse,
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puts it up on its website
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and then delivers the product to the consumers.
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The second is the 3P model.
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it means that someone else makes the product,
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and sells their product on Amazon,
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while Amazon acts as a marketplace,
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and then the product is delivered to the consumers.
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In the 3P model, Amazon basically acts as a platform,
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that is used by the sellers
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and the consumers
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to sell or buy their goods.
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Interestingly,
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there isn't a significant profit margin in the 1P model.
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Most of the profits come from the 3P model,
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because in 1P the goods need to be stored as well.
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It is filled with hassles
[988]
like buying large warehouses,
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for storing the goods,
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and the duration of storage,
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a lot of money goes into these.
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In the 3P model, there's just the website,
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on which people can come to sell and buy products.
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For Amazon, the benefit lies when the 3P model is used more.
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Initially, Amazon had used the 1P model,
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when it began in the late 1990s.
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In this chart, you can see,
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the proportion of usage of 1P versus 3P.
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With time,
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the percentage of 3P kept increasing.
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By 2018,
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58% of things that were being sold on Amazon,
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were sold under this 3P model.
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Meaning that Amazon wasn't going into the hassles anymore.
[1028]
And was earning more profit.
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The revenue sources of Amazon
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and the money it earns from its various businesses
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can be seen in this chart.
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If you look at the numbers from 2020,
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the online store contributes the most revenue,
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around $200 billion.
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And AWS is a major source of revenue for Amazon,
[1046]
because it is the most profitable.
[1048]
This chart shows you the revenue only
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the money that the company earns.
[1052]
But doesn't show the amount spent by the company.
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For that, we turn to the chart of profitability.
[1056]
Interestingly,
[1057]
Amazon, as a company, wasn't very profitable
[1060]
in its first decade.
[1061]
Until 2014,
[1063]
the company was earning next to no profits.
[1065]
Because all the revenue of the company,
[1068]
was invested back into the business by Jeff Bezos,
[1071]
to expand the business.
[1072]
But after 2016 and especially after 2018,
[1076]
Amazon has started earning profits.
[1078]
And is now focusing on profitability too.
[1080]
Over the last few years, Amazon has raked in so much profit,
[1082]
but the credit for that mainly goes to
[1084]
AWS,
[1086]
because AWS is one of Amazon's businesses with the highest profit margin
[1090]
with a profit margin of 30%.
[1092]
And it kept growing with time.
[1094]
Even in the last few years, Amazon's expansion wasn't stopped.
[1098]
Amazon Logistics saw good growth.
[1100]
Here, they are giving competition to the delivery service companies.
[1104]
Such as UPS and FedEx.
[1106]
These are big in North America.
[1107]
And because of these reasons, friends,
[1109]
today, Amazon could become a $1.6 trillion company.
[1115]
This was Amazon's interesting story.
[1117]
If you liked this video,
[1119]
you can go check out this playlist
[1121]
of other videos on business models
[1123]
on Tesla, WhatsApp, and the business models of several other companies
[1126]
have been discussed in detail like this.
[1128]
And you can comment below
[1130]
and tell me which other company's model breakdown would you like to watch?
[1134]
The link to download Skillshare is in the description below.
[1136]
Let's meet in the next video.
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Thank you very much!
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