Amazon Business Model: the Ultimate Overview

In the 80s we would have called a business like Amazon a conglomerate. They have expanded into so many business areas that it is head-spinning. But unlike a conglomerate, they still make sure most of their offerings a linked and related to each other. In this ultimate overview, we will look at some of their most popular offerings.
This is what we are going to look at today:

1. Online retail
   • Fulfilment and delivery network
   • Shopping experience
   • Customer value proposition
2. Amazon devices: gateways to magic worlds
   • Kindle
   • Fire Tablet, Phone
   • Fire TV and Prime Video
   • Echo, Alexa and AI
   • Business models: Kindle, Prime Video, Alexa
3. Amazon Web Services
4. Amazon Prime
5. Fundamental business model principles

As always, we are going to look behind the scenes to understand their business models, the economics, the strategies and what we can learn from it.

---

This may seem llke a long article but it is only a fraction of our covering of Amazon within our course on the best digital tech business models today. Therein, we will present Amazon (and many other so called tier 1 examples) throughout our 6 months program. The business areas and business models shown in this article are spread across several modules. The modules will first outline the theory concepts relevant to Amazon (and ecommerce) and then present the details.

Each chapter that you see in this article will have 2-3x more details in the course - and frankly it's the next level of detail that will make you an expert. 

We then apply the same approach to several other tier 1 examples in the course. Check out the course page for which other companies are tier 1 examples. Our tier 1 examples are there to provide depth of knowledge. We then have also tier 2 & tier 3 examples which are to provide breadth and a hue wealth of ideas and other approaches. You will love it!

---

Online retail

Amazon has long surpassed the competition in terms of online sales. They are getting closer to the top of overall retail (including brick-and-mortar retail).

Amazon revenues

• In terms of retail revenue, Amazon ranked 6th globally in 2016 in overall retail f
• (here is a nice Deloitte pdf report on the state of global retail)
• But they are still growing at still double-digit rates which none of the competitors is
• Walmart still is a class of its own with currently more than 3x of Amazon's revenues (2018)
• Projected revenues for Amazon in 2022 are $356b (Walmart's 2018 revenues have surpassed half a trillion USD, $500.34b in 2018)

---

Delivery and fulfilment network

At the heart of Amazon's retail business model success is its delivery and fulfilment network.

As of 2018, Amazon has over 300 facilities in the US alone. The facilities fall into a number of categories:

1. Inbound cross doc centre
2. Airport hub
3. Fulfilment centres (with various subtypes / those storing certain types of goods)
4. Sortation centres
5. Delivery stations
6. Prime now hubs
7. Amazon Fresh (which also has a pick-up option)
8. or brick-and-mortar retail, e..g. Amazon Book, Go, Whole Foods Market and Amazon 4 star

Each of these fulfilment facilities has its distinct characteristics and functions.

---

Note that this article has not been updated to the latest developments since 2018. However, all our course resources - including all our Amazon coverage (and all other examples) - are up-to-date as of late 2021 and 2022. It has been very valuable to follow many of our example companies for more than 5 years as we have seen which of their approaches have worked and which not, how the competition has reacted and how Amazon (and our other example companies) have responded. This is fascinating stuff that will be of great benefit for you when you take the course.

---

Amazon Marketplace

More than 50% of items (in terms of units, not revenues) sold through the Amazon pages are from 3rd party sellers. One prominent recent seller is Nike after resisting for a long time. But most 3rd party sellers are much smaller. Amazon has opened their pages to 3rd party sellers in 2002 and the share of those sales has increased continuously.

Amazon Marketplace falls under the platform business model that I have described in many articles. The revenue model is often a transaction fee as a percentage of the sales. This is often combined with other revenue sources, e.g. advertising as well as FBA, SWA, etc.

Fulfilment by Amazon (FBA)

Fulfilment by Amazon is a service that offers merchants to store their items in Amazon fulfilment centres and delivery infrastructure to reach the customer. It includes checkout and payment options, management of returns and more. Items can be used to sell through the Amazon pages or through other sales channels.

Shipping with Amazon (SWA)

Amazon has increasingly insourced elements of the delivery network and then opened it up to external customers as a service. They have started with the last-mile delivery using Amazon Flex drivers but have increasingly expanded on this.

Amazon Prime "free" shipping

Amazon offers "free" shipping on millions of eligible items for an annual (or monthly) subscription fee for Amazon Prime. $8b of these revenues are being attributed to fulfilment and delivery services. "Free" shipping was at the core of Amazon Prime and is still being valued highly within the overall Prime package as we will see a bit later

Growth: expanding categories

Amazon is growing in many directions at the same time. On the one hand, they are extending their fulfilment and delivery infrastructure and associated services. On the other hand, they are also expanding into more categories.

While only a fraction of food/groceries are sold online, it is one of the largest forecasted growth areas for online sales.

---

Here are some of Amazon's endeavours in the categories that are trailing have yet to meaningfully shift to online retail.

Food/groceries:

• Amazon Prime Pantry: Groceries (dry goods) and household goods
• Amazon Fresh: Includes also perishables and produce and stored & delivered in a cooled infrastructure chain
• Amazon Prime Now: The essentials (range of 15,000 products and restaurant orders, etc) that can be delivered within 2 hours for free (or 1 hour with surcharge)
• Whole Foods Markets (WFM): Amazon acquired WFM with their over 350 physical stores. WFM produce is starting to be delivered through Amazon's network
• Amazon Go: Automated check-out and a range of popular products

Furniture:

• Extensive range of Amazon and 3rd party furniture and appliances choices
• Dedicated fulfilment facilities specialising on large items, such as furniture, sports equipment and more (Redsland, CA)
• In the US, Amazon is already the largest online retailer of furniture and appliances with almost double the revenue of runner-up Homedepot
• Online furniture sales has a projected compound annual growth rate of 11.9% (CAGR) between 2018-2022

Apparel:

• "Amazon currently claims about 6.6% of the apparel market. That share is expected to increase to 8.2% by next year and further expand to 16.2% within five years" by the estimates of one analyst
• Amazon fashion brands: Amazon launched seven fashion brands with some observers wondering if Amazon wants to get into the high margin apparel business at large scale
• Zappos.com: the famous online shoe and apparel retailer has been acquired by Amazon in their first foray into apparel but still running under their own brand (while having moved operations of 2 of their warehouses to Amazon)
• Prime Wardrobe: accessible to Prime members only. It allows apparel choices to be sent home for trying them on. Unwanted items can be returned for free (within one week)
• Several fulfilment centres dedicated to apparel, like the massive one in Jeffersonville, IN
• Amazon has patented clothing manufacturing-as-a-service
• And they have opened a clothing manufacturing plant in Norristown, PA

Pharmacy/medication:

• Amazon has already a large set of products in health and personal care
• They also have a large assortment of medical, prescription-free products, supplements as well as over-the-counter medication
• Amazon has acquired PillPack in 2017, an online pharmacy that provides consumers with prescription medication in prepackaged doses
• Prescription medication has its own set of regulatory requirements (that includes transport requirements), with PillPack being licensed to ship prescription medication to most US states
• They are also looking into expanding into entering the medical device market
• Compared to other categories, Amazon is only in the early stages within the medical / health care sector and there are a range of scenarios for their long-term plans
• Amazon, JPMorgan Chase and Berkshire Hathaway have created a non-profit health-care venture for their combined 1.1m employees that aims to introduce technology solutions to simplify the health-care system

The playbook

These are a few examples of retail categories that Amazon is expanding into. Each category would deserve their own article. But I hope it gives you an insight into how Amazon enters/grows new product categories:

1. Large choice of product offerings on their pages composed of Amazon-owned and 3rd party inventory
2. Acquisitions of suitable companies, mostly smaller ones (Whole Foods Market is the notable exception)
3. Starting a number of "secret" (Amazon-owned) brands within the category
4. Establishing a fulfilment and delivery structure with respective warehouses and other infrastructure (e.g. temperature-controlled delivery chain, bulk item handling, prescription drug management)
5. For some of the categories: integrating a subset of the overall choice as part of the Prime membership or dedicated subscription models, etc

A lot of Amazon's revenue growth will come from these areas (even though they may not get as much media attention).

With this, we are slowly leaving the world of physical goods.

---

Online shopping experience

Web pages are an obvious contributor to a good online retail experience. Sure, there are nicer retail pages than Amazon's pages. Upscale fashion brands with a limited set of products can afford to have well-crafted, individual pages. Amazon's pages, however, tick all of the boxes of a great online shopping experience while covering hundreds of millions of products.

Let's look at a few different examples here:

1-click

Amazon has patented their 1-click solution in 1999. It is probably the most convenient checkout option around. Knowing of its value, Amazon defended it legally against early competition. They managed to keep large parts protected under the patent and forced e.g. Barnes & Noble to refrain from copying the functionality. They licensed it to Apple for use in the iTunes store. The patent has expired in 2017 which means you will see it spread.

Review system

Apart from low prices, reviews are one of the most important factors driving customer decisions. Would you buy something low-rated just because it's cheap? Likely not. Reviews are also one of the most important factors for the ranking of products on search pages. With this, there is big money at stake for sellers. And that means there are people trying to rig the system with fake reviews.

1. 1. The review system is one of the most important decision and ranking tools
   2. It is of significant value for Amazon as well as for 3rd party sellers on Amazon
   3. Amazon has a range of community and review guidelines
   4. Amazon encourages reviews, e.g. via the early reviewers program
   5. They allow other users to vote on the helpfulness of reviews and display more helpful ones higher up (but this system has been used for manipulation itself)
   6. Amazon shows the list of top reviewers based on helpful votes and has even a hall of fame for them
   7. They have filters and machine learning tools to weed out fake reviews
   8. Estimates of the number of fake reviews range from 1% according to Amazon vs 30% stated by fake-review detection sites (both of which have an incentive to over or understate the problem)

Personalisation

Recommendations are a part of Amazon's personalisation efforts. And they are essential to more sales. A 2012 McKinsey report finds that "Already, 35 percent of what consumers purchase on Amazon and 75 percent of what they watch on Netflix come from product recommendations based on such algorithms." Multiply the roughly 400 million products on Amazon with the hundreds of millions of users and you can easily see that this is a complex system to pull off.

Recommendations can come in different forms:

1. 1. 1. "Recommended for you"
      2. "Frequently bought together"
      3. "Your recently viewed items and featured recommendations"
      4. "Your browsing history"
      5. "Related to items you viewed"
      6. "Best selling"
      7. Off-site recommendations via email

---

Customer value proposition

The value proposition combined the on-page and off-page elements that we have talked about.

Take for example the first item, prices. You can only offer cheaper prices sustainably than your competition if you have a lower cost structure. For an online retailer, that translates into a cheaper-than-competition fulfilment and delivery infrastructure, sourcing, etc.

1. This infrastructure also underpins some of the other reasons people purchase on Amazon, such as fast shipping and selection (selection requires respective special fulfilment and delivery capabilities as mentioned above).

Pricing strategies

This concludes Amazon's online retail overview which is the biggest revenue generator (but at razor-thin margins). We are moving onto the other fascinating parts of Amazon which are also starting to make serious revenues.

---

Gateways to magic worlds: Kindle, Fire TV, Tablet, Echo

The Kindle is a much bigger endeavour than just an ereader. It is not only disrupting brick-and-mortar bookstores but also the publishing industry. And there is yet more. Amazon Kindle, Fire TV, Tablet, Echo and Alexa are gateways to something much more complex on the other side of the screen. And they have a number of characteristics in common:

1. 1. 1. On the surface, they are a shiny gadget
      2. Are the front-end that is connecting to a deeper back-end infrastructure
      3. Connect to and are a part of a marketplace, sales/distribution channel that is fully owned by Amazon
      4. Feed back valuable customer (usage and other) data to Amazon
      5. Enable several revenue streams and business models
      6. Amazon keeps investing continuously in these infrastructures and marketplaces
      7. And into complementary businesses
      8. Enable powerful direct data network effects and indirect network effects

It's not about the shiny gadget

The revenues made from the sales of the physical units (Kindle reader, Fire TV stick, Echo Dot) typically seem to cover Amazon's own costs. We don't know this for sure as Amazon doesn't reveal its numbers. Some experts are disassembling the respective gadgets and adding up the costs of the individual parts and their conclusion is that Amazon doesn't make any profit.

Amazon's sales of Echo, Fire TV and Kindle made an estimated $305m in the first half of 2017 according to one analyst’s estimates. While impressive, it's still a good 95% lower than Apple's iPhone sale in the same period.

---

The Kindle system and the data advantage

If it was about the razor-and-blades model Amazon would price the eReader low just to price the ebooks high. Looking at their pricing structure this is not the case (benchmarked to the book industry):

1. 1. • Amazon incentivises eBooks to be sold for $2.99-$9.99 by paying 70% royalties to the authors for books priced within this band and 35% otherwise
      • This is significantly higher than the 10%-15% royalties paid traditionally
      • Authors also retain more rights on their work than in traditional models which they can sell on, e.g. to movie producers or print publishers
      • Many books are still being published by traditional publishers into the Kindle platform
      • But the number of independent self-published authors has significantly increased since Kindle (as you would expect)
      • This is important as the Kindle system allows authors to circumvent the traditional gatekeepers

With this, put 1+1 together:

1. 1. • The incentives for readers to join the Kindle system are low prices on the Kindle reader and books
      • The incentives for authors are independence from traditional publishers, higher royalties and a broader range of rights on their work
      • The traditional publishers, too, will not ignore Kindle as an additional sales channel once there are enough readers
      • With this, the conclusion is clear: Amazon's low prices for both sides (creators and consumers) is to stoke indirect network effects that underpin all platform business models

Of course, the traditional low unit profit, high sales volume that underpins most of mass retail still persists but this model is more sophisticated. It is not about selling the consumable unit (ebooks) at ridiculous margins (as in the case of some razor blades or inkjet cartridges).

Disrupting bookstores and publishers

The Kindle platform has already disrupted traditional bookstores who still had growth in the first ten years after Amazon appeared but then fell off a cliff when Kindle was introduced.

Traditional publishers are the next domino piece. Not only can authors now bypass the traditional gatekeepers via self-published eBooks. But they can now publish paperbacks via Amazon. And it does not have to end there. Amazon could well enter the higher value-adding functions, such as editing and illustrations via their professional service marketplace. This would leave no place to hide for the traditional publishers. What this would mean for innovation and quality of future books remains everybody's guess.

The data advantage

The most staggering element of the Kindle platform is that we get a glimpse into the benefits of good data. You hear often that good data translates into a real competitive advantage. And we know this is true for our own companies. But it is rare to get good insights into the data space of large companies like Amazon who are known for not sharing a lot of data.

We get these insights from a smart bunch of guys who have written algorithms that scan over a million Amazon pages each day to re-engineer daily sales figures. Comparing these deep insights to the data of traditional analysts (which is used by many industry participants for their decisions) is eye-opening.

1. . I can't repeat all the points made there. But take as one highlight that a

whole lot of industry investment decisions (which books to publish, promote, shelf space, franchise investments, etc) are being made with 50% of the data missing, and worse yet, with the available data telling the wrong story.

The data above is compiled by scanning over a million Amazon pages daily. And that means: Amazon has the full picture!

The combination of well-managed indirect network effects and deep meaningful data (which is so important for managing incentives well and driving participant behaviour) is one of the most powerful innovation ingredients that we have discovered in the last 2 decades.

---

Fire TV and Prime Video

Prime Video and Fire TV is another one of those gadget + content platform combinations. Similar to the Kindle platform, the main story plays behind the scenes. There are 10 business models enabled by the Kindle system and 10 enabled by Prime Video. (There may be even more but I stopped looking for more once I identified 10). Most are similar, a few are different.

Prime Video is a tightly controlled platform business with the consumers on one side and the producers on the other. The various Fire TV devices are just one way to display Prime Video content. Apple and Android devices, Amazon Tablet, Smart TVs, game consoles, etc are others.

Content

For most of the content, which is not exclusive to Prime, Prime Video also is only one distribution channel. It offers various types of content:

1. 1. 1. Amazon Originals (TV series and movies)
      2. Non-Amazon movies and TV shows
      3. There is a total of >20,000 items to buy or rent (no subscription required)
      4. Prime subscribers can access a large subselection of >6,000
      5. Amazon Original TV series are only available through Prime Video
      6. You can subscribe to entire channels, such as CBS, HBO, Cinemax and many others for additional fees per channel (known as over-the-top media services)
      7. Fire TV also can be used to access ones Netflix, Hulu and other streaming accounts
      8. Prime Video does not feature user-generated content like YouTube which is why Prime TV is a closely controlled platform (B2C only, no C2C)
      9. User-generated content is available on Amazon's Twitch which is a separate platform (specialising on certain content, see below)

Importance of original (exclusive) content

While it is important to have a large selection of content studies show that having original (=exclusive) content is crucial to attracting subscribers. “Our results indicate that if a streaming service wants to attract subscribers, offering content from TV channels is not a sufficient strategy. Building on this insight, we found that offering original content can be one important way that streaming services can differentiate their offerings from competitors,” reads a study published on Harvard Business Review, HBR.

Creation of Amazon Original content

Amazon Originals are an important way to differentiate their offering and get subscribers.

1. 1. 1. Amazon Video has a long list of Amazon Originals which are exclusive on Prime Video. Many seem to have been canned after the first season which indicates data-driven experimentation
      2. They produce their exclusive shows and movies in one of their many studios
      3. One remarkable way of sourcing scripts is for independent creators to submit their story to Amazon via a dedicated portal. From there it becomes a commercial process owned by Amazon (this is different to Kindle). It includes early prototyping and testing at their premises with small audiences to determine the prospects of the script. Amazon Studios pays successful writers progressing levels of royalties
      4. Additionally, they have also purchased exclusive rights on existing shows to exclusively air them in other countries (and with some gap re-stream them in the originating country)
      5. Originals come at a price totalling $5b per year for original and licensed content with examples:
         • The production costs for the 2 seasons of “Man in the high castle” seem to have surpassed $150m
         • Amazon has bought the global television adaptation rights for “Lord of the Rings” for $1b – this is before any production or any other costs

Exclusive content, Prime Video and Prime

The whole point of exclusive content is to use it to funnel people into an Amazon Prime Video or Amazon Prime subscription:

1. 1. 1. The original content can be accessed only through a Prime Video
      2. In some countries, Prime Video is only available through the overall Prime subscription
      3. Where Prime Video can be subscribed to individually, the pricing tactic is to make it not much cheaper than the overall Prime bundle
      4. Amazon assesses the success of individual shows in bringing in new subscribers with an internal metric called cost per first stream (chart below), i.e. the cost of the show divided by the number of new subscribers who streamed the show first
      5. It shows considerable customer acquisition costs for many of their shows ranging from $500-$1500 cost per first stream (equal to 4-12.5 years of Prime membership fees)
      6. There are some indications that Prime Video consuming subscribers have a higher propensity to renew their Prime subscriptions and generate revenues through Amazon’s other offerings

---

Amazon Fire Tablet and Fire Phone

Amazon has also entered the phone and tablet space with varying success.

Fire phone

The Fire phone ended unsuccessfully. Fire phone 1G introduced in June 2014 was never followed by another generation of phones due to the commercial failure of the initial phone. Fire phone was discontinued from August 2015.

Fire tablet

Amazon had more success with its own line of tablet, called Fire Tablet. The latest line is the Fire 8G released in 2017. The later generations are available as HD or HDX (being the high-end model) with higher resolution, faster processor, etc. As of earlier this year (2018), Fire tablet was the second best selling tablet after Apple's tablets, however, at significantly higher growth rates than Apple's devices.

Fire OS

Amazon has its own operating system (OS) which is based on Android. They have forked Android and customised the user interface to feature their own ecosystems. Amazon's apps, such as Amazon Appstore, Prime Video, Amazon Music, Audible, and Kindle Store come with their Fire OS.

Android offers two (free) licensing models, the Android Open Source Project (AOSP) and the Google Mobile Services (GMS). GMS is the more advanced version but comes preinstalled with Google's apps.

AOSP is more basic and most importantly does not have the Google Play store and with that not way to access the >2m Android apps. Not many companies have the resources to build their own app store hence will use GMS.

Not so Amazon. They have built their own app store most likely based on the fact they can promote their own apps and other strategic considerations.

Amazon Appstore

Launched in 2011 at the time of the Amazon Tablet introduction, Amazon's App store came with a mere 3,800 apps available. This confined ecosystem is a significant limitation to the customer value proposition. Over the years, more developers have made their apps available on Amazon Appstore. The sales success of their tablet helped to increase the installed base which incentivised developers to make their apps available on Amazon Appstore.

Amazon keeps 30% of revenues of each app sales and passes the remaining 70% onto the developer. The low price of the tablet was essential to trigger the virtuous cycle of hardware sales and an increasing amount of apps becoming available (similar to the Kindle).

Twitch

In 2014, Amazon acquired a video streaming platform renamed to Twitch. This platform is mainly focusing on live streaming of video gaming events. Within this segment, Twitch is by far the largest player outsizing YouTube Gaming by a large margin. Twitch is very popular in the segment of 16-34 year old males and offers additional features for Prime subscribers.

It will be interesting to see if Amazon will expand Twitch to a broader streaming that competes with YouTube.

Amazon has done remarkably well in the space of these type of personal electronic devices. However, strategically, they are an early follower in this space rather than the leading innovator.

---

Amazon Alexa, Echo and AI

Now we are getting to one of Amazon’s biggest bets; one that promises to change how humans interact with machines. Amazon's AI-based voice recognition system Alexa that underpins their Echo home pod devices.

Amazon has taken the lead among such powerful competition as Apple, Microsoft and Google in terms of smart speaker shipments (but Apple's Siri leads on the dimension of most frequent usage). Amazon has also taken a somewhat different approach than the other giants in the architecture of their smart speakers:

1. 1. 1. The other three have initially used their respective smart assistants (Microsoft: Cortana; Apple: Siri; Google Assistant) to control their ecosystem of devices and services
      2. E.g. Cortana can be used to control Windows, Siri can be used to control one's iPhone
      3. Amazon has done that too, e.g. you can control Fire TV through Alexa or Alexa can read your Kindle book (and will pick up where you last stopped)
      4. But they immediately took the next step. They have initiated an ecosystem of Alexa-controllable 3rd party devices
      5. The others will undoubtedly ramp up their efforts to catch up on Amazon's lead on this dimension, here is what Apple does

Alexa has over 50,000 skills (=dedicated apps for Alexa), over 20,000 products across 3,500 brands. While Apple, for example, is playing catch-up they are not exactly starting from scratch. Through the introduction of SiriKit, they are tapping into their over 2m apps. These don't yet have Siri integration but the install base of iPhones is obviously an attractive interface for all app/device developers to get connected to.

Indirect network effects

Powerful indirect network effects are one of the most prevailing benefits that connects device manufacturers, users and the smart assistant platform. One research paper (based on Amazon data) states "According to data cited by Rausch, businesses saw a 43 percent lift in business in the nine months after launching an Alexa-enabled product… Rausch, again citing Amazon’s data, said that when a company … Works With Alexa capabilities into their product (meaning you could ask Alexa to control that device) businesses on average see a 53 percent boost to their business almost immediately."

This is one aspect but there are other valuable network effects that come with smart assistants.

Use cases and customer value propositions

Use cases are important to the customer value proposition. Here is a brief list of what Alexa and connected devices can do at this stage.

1. 1. 1. Entertainment: Voice control Amazon Prime Video, music streaming, get books read or play audiobooks
      2. Communication: Use Alexa devices as an intercom; call others, voice message or SMS
      3. Smart home: Voice control lights, smart plugs to turn on/off electrical appliances, Thermostats, air conditioners, etc, (Security) cameras or video devices; Define routines of several actions combined, e.g. morning routine
      4. Laptops & PCs: Alexa-enabled PCs and laptops can save some typing and be used as an interface to control other Alexa devices
      5. Vehicle entertainment systems controlled via Alexa
      6. Shopping: Reordering items through Prime Now (mainly groceries), likely an area that Amazon will further expand
      7. Other: Weather, traffic, News, information, sports updates, etc; To-do lists, shopping lists, reminders, alarms; Local search: restaurants, shops(!), etc
      8. Skill Blueprints: personalisable templates, e.g.: workout routines; inspirational quotes; weekly household to do list and thousands more

Amazon has been working secretly for years to be one of the early/first movers on this new value proposition and platform.

---

Amazon Web Services (AWS)

I doubt there were too many industry experts who would have predicted the success of AWS about 10 years ago when it became available as a commercial offering. Amazon started with the efforts that lead to AWS as early as 2004 for their internal use. From there, it has become one of the most profitable business areas within Amazon.

But what is AWS for starters? Most of AWS’ services fall under into what is called Infrastructure as a Service. When setting up an IT architecture firms have various options from fully in-house, on-premises to fully outsourced. Here are the key categories:

1. 1. 1. On-premises: this is the traditional architecture where the in-house team manages everything (though there are again differences depending on in-house servers or usage of data centres). Most AWS clients would have a hybrid solution of some on-premises and AWS
      2. IaaS (Infrastructure as a Service): This type of service is the one closest to the hardware level without giving access to the hardware itself. It gives access to the operating system layer (in AWS you can choose between Windows or Linux OS) and take care of the layers between the OS and your applications
      3. PaaS (Platform as a Service): With PaaS, users can focus on the application and data layer only. AWS beanstalk is one of the few AWS services that falls under this category. It allows users to easily deploy and manage their applications on AWS without worrying about the layers below
      4. SaaS (Software as a Service): SaaS has become increasingly popular, e.g. Microsoft Office 365 is the SaaS version of Microsoft’s traditional Office applications. Other well-known examples are Google office apps, Slack, Zendesk, Dropbox, Salesforce, etc. AWS itself is not an SaaS service but they have offer solutions for SaaS providers to build their services on AWS

Architectures for common problems

How the individual blocks can be put together to solve for common problems is part of the architectural design. The diagram below shows Amazon’s recommendation for a media sharing functionality that could, for example, be part of a social media platform.

These architectures can help save tens of thousands of development manhours of building similar functionality in-house.

Netflix: 100% on AWS

Netflix is to 100% on AWS - this is amazing given they use up 15% of internet bandwidth (as always, there is a small caveat: recently Netflix started to explore Google Cloud as well - but to such a small degree that we can comfortably say that Netflix is 100% hosted on AWS which also hosts Amazon Prime Video to 100%). Both together make 18.7% of global internet traffic.

Market share

Amazon has managed to translate their first-mover advantage into market share compared ahead of the early followers. Among the competitors, Google is said to be investing heavily in their cloud business to catch-up. Microsoft is stated as the only competitor with a comparable comprehensive offering in Gartner’s comparative study (magic quadrant) with Google having some (and IBM a lot of) catching up to do.

---

Amazon Prime

Amazon has a number of subscription businesses models for their various types of media/content and consumer products. HEre some examples:

1. 1. • Kindle Unlimited: Over 1 million books for the Kindle eReader and 1,000s of audiobooks for a monthly subscription
      • Audible: Subscription to over 200,000 audiobooks
      • Subscribe & Save: Subscribe to get delivery of your favourite grocery items at a repeat schedule (diapers, anyone?), associated with savings but also price variations
      • Prime Video: is available to be subscribed to separately (in some countries) but the difference in price to the overall Prime is so little that only a few people would be taking up Prime Video by itself
      • Different types of subscription boxes of various consumer products

Amazon Prime

Prime is Amazon's master subscription model and has now over 100m subscribers. It is an unlikely bundle composed of heterogeneous offerings that seems to have a great appeal to household consumers.

1. It started with "free shipping" on millions of items (large, bulky items are excluded). Over the years more elements have been added to this subscription. Here some highlights:
   1. • Free shipping on a lot of items, 2-day shipping in many areas, lower incremental pricing on priority/international shipping
      • Prime Video: the only way to watch Amazon Originals is to subscribe to Prime. Also includes access to many of the popular shows
      • Prime Music: 2 million songs (but limited to 40 hours / month)
      • Kindle: Access to a monthly changing selection of 1,000 books
      • Exclusive access to various types of deals as well as access to media on release day
      • Prime Wardrobe: A try-before-you-buy offer for clothing with free delivery and return
      • Rewards in conjunction with Amazon credit card
      • and lots more with additional stuff being included over time

---

Overall

Phew, we are getting towards the end. Let us now look at a high level of the key business model ingredients.

Revenues (FY 17)

From their Annual Report 2017 (pdf):

1. 1. 1. Online stores: $108b
      2. Physical stores: $5.8b
      3. Third-party seller services: $31.9b
      4. Subscription services: $9.7b
      5. AWS: $17.4b
      6. Other: $4.7b