🔒 The Economist examines Amazon.com as it turns 30

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Economist

From Prime Video to AWS, the electronics empire is bringing its disparate parts together ___FIXED_PAYMENT___

In the summer of 1994, a job posting for software engineers was posted on Usenet, an early precursor to Internet forums. The company in question planned to “pioneer online commerce.” Applicants had to be able to design complex systems “in less time than most competent people believe possible.” Resumes could be sent to Jeff Bezos at a Seattle startup called Cadabra.

The name didn’t stick—“Cadabra” was too easy to confuse with “cadaver” in phone calls—but the ambition did. Amazon, which turns 30 on July 5, has truly changed the world of online shopping. This year, its websites will sell about $554 billion worth of goods in America, according to JPMorgan Chase. That gives it a 42% share of American e-commerce, far more than the 6% that Walmart, its closest online competitor (and the country’s largest retailer), has.

And Amazon hasn’t stopped pioneering retail. It invented the Kindle, the e-reader, Alexa, the smart speaker, and, more importantly, cloud computing—Amazon Web Services (AWS) has a 31% share of that $300 billion market, according to Synergy Research, a data firm. It also runs Prime Video, the fourth-most-watched streaming video service in America. Its new, high-margin advertising business is already the world’s third-largest, behind Alphabet (Google’s parent) and Meta (a Facebook subsidiary). One subsidiary, Zoox, is building self-driving cars. Another moon project, Kuiper, which is developing a fleet of low-Earth-orbit communications satellites, is literally aiming for the sky.

On June 26, Amazon got an early birthday present when the market value of its tech empire topped $2 trillion for the first time (see chart 1). But like all such milestones, Amazon’s 30th anniversary is not just a moment to celebrate achievements but also to look to the future. The big question hanging over the company as it enters its fourth decade is how to manage its growing size (see chart 2).

Amazon’s business units are “fairly independent,” a former executive said. That was often intentional. Mr. Bezos wanted to separate the advertising business from e-commerce so that the retail division wouldn’t be dependent on the ad unit’s high margins. At first, AWS operated independently of the rest of Amazon because the company didn’t want to give the impression that it was selling spare computing power to Amazon during non-business hours, says Rick Villars of IDC, a research firm. More recently, some investors have even called for a complete spinoff of the cloud business, believing that would create value for shareholders.

Instead, Amazon’s fourth decade seems to be an era of integration. The company has grown so large that any new, disruptive investment is expensive and high-risk. Andy Jassy, ​​the former AWS chief whom Mr. Bezos named as his successor in 2021, thus seems eager to generate value by more tightly combining the company’s existing businesses. Mr. Bezos, who retains a 9% stake in the company and a large say in strategy, seems to approve. The makeover would make Amazon more like Apple and Microsoft, two older big-tech rivals that combined and cross-sold their products to achieve dominance in consumer devices and business software, respectively—and valuations of $3 trillion.

Stitching work

One area where Mr. Jassy already has his sewing kit is retail and advertising. The thread that connects the two businesses is Prime, Amazon’s subscription service, which has about 300 million members worldwide, giving shoppers free shipping and access to Prime Video. Prime members spend twice as much on Amazon’s websites as nonmembers and tend to log in more often. Amazon also has intimate knowledge of their shopping behavior, which allows it to target ads more precisely.

Advertisers are willing to pay dearly for the service: Amazon’s ad business enjoys an operating margin of about 40%, higher than even its cloud business, not to mention its much less profitable retail arm. Most of those ads, which account for four-fifths of the company’s ad sales, are placed in search results in its app or next to product listings. But a growing share comes from third-party websites, most recently Prime Video. In January, Amazon began serving ads to viewers in America, the U.K., Canada, and Germany.

Only one in seven Prime members is expected to pay the additional fee ($3 per month in America) for ad-free streaming. That leaves perhaps 260 million Prime members who are potential viewers of ads on the platform. JPMorgan Chase believes video ads alone will boost Amazon’s ad sales by about 6% this year, adding $3 billion to the top line. Given the high margins of the ad operation, the impact on profit will be much greater.

To convert more Prime members into actual ad viewers, Amazon is spending money on content. It recently signed YouTube star MrBeast, who is said to be worth $100 million. It’s trying to seal a deal in which it will pay $2 billion a year for the rights to show National Basketball Association games on Prime Video. It’s already reportedly spending $1 billion a year to broadcast some National Football League (NFL) games. The company believes the price tag is worth it, since popular sports dates like “Thursday Night Football” are among the most popular Prime sign-up days. And as Mike Morton of research firm MoffettNathanson notes, ads aired during sporting events are among the most profitable in the ad business.

Mr. Jassy’s larger task involves making the retail business and AWS a more seamless whole. Prime is playing a role again, albeit a smaller one: The cloud unit helped Prime Video win the rights to stream the NFL because the terms of the deal required ultra-reliable infrastructure, which AWS could more easily provide than its competitors (fans of live sports would not tolerate buffering). Other common threads include deals like the recent one with Hyundai, which included making AWS the South Korean automaker’s primary cloud provider and selling its cars on Amazon’s websites. Analysts speculate that AWS software can also help retail’s 750,000 warehouse robots sort customer packages. And having a company as large as Amazon as a dependent customer gives oh my confidence in scaling up your business, which helps spread costs.

The key thread that connects Amazon’s two core businesses is generative AI. Most rivals will struggle to match Amazon’s access to specialized AI hardware, which is scarce but plentiful thanks to long-standing commercial partnerships with companies like Nvidia, which makes AI semiconductors.

Amazon has already launched a range of products using the technology, including a customer review summary tool, a virtual shopping assistant and an image builder for advertisers. E-commerce sellers can use the same technology to speed up the creation of product listing pages, for example by directing a machine to a personal website where the goods are already sold. Amazon’s fledgling pharmacy uses generative AI to help fulfill prescriptions and manage drug inventory. The retail business, in turn, provides a vast pool of data on which to train AI models that can then be offered to AWS customers.

The increasingly tight integration may not be to everyone’s taste. The closer merging of e-commerce, streaming, and cloud businesses could put off big AWS customers like streaming competitor Netflix or online grocery rival Ocado. Last year, the U.S. Federal Trade Commission (FTC) filed a lawsuit against Amazon, accusing it of antitrust practices such as discriminating against sellers who sell products cheaper elsewhere online and blocking sellers from its fulfillment network. The agency sought penalties “including, but not limited to, structural relief”—as it says in trustbusters, “breaking up.” Amazon denies the allegations.

Investors seem to be dismissing such concerns. Amazon’s recent stock rally has not been derailed by the FTC lawsuit. And for every cloud customer that AWS loses to rivals like Microsoft Azure or Google Cloud Platform, it could gain one that Microsoft and Google’s new businesses in their increasingly tightly knit empires reject.

Indeed, the biggest risk to Amazon’s growth at 30 isn’t antitrust cops or cross-cloud customers. It’s competition. Microsoft is widely considered to have taken the lead in integrating generative artificial intelligence to its diverse enterprise offerings through a partnership with OpenAI, a startup at the forefront of technology (and producer of Chatgpt). Alphabet, the world’s largest advertiser and owner of YouTube, is trying to get into e-commerce again. Walmart, which dominates the $2 trillion U.S. grocery market, is getting into the ad business and has launched a Prime-like subscription service that helps it turn purchases into data. Amazon will have to show that it’s a better seamstress if it wants to avoid a midlife crisis.

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