Former Amazon Employee Explains How The Company's Business Model Really Works (AMZN) - seattlepi.com
Geege Schuman stashed this in AMZN
Former Amazon employee Eugene Wei has a thorough analysis of Amazon's business model, and why everyone seems to misunderstand the company.
His full analysis is worth a read, but if you're short on time, here are the key points:
- His two-sentence explanation of Amazon's business: "Amazon is a classic fixed cost business model, it uses the Internet to get maximum leverage out of its fixed assets, and once it achieves enough volume of sales, the sum total of profits from all those sales exceed its fixed cost base, and it turns a profit. It already has exceeded this hurdle in its past."
- Amazon loses money on a few retail items, but when that's happening it tries to correct the reasons it's losing money. There are a few loss-leading items, but for the most part its retail operations are profitable.
- Amazon as a platform is incredibly profitable. Lots of people and companies sell through Amazon, which has very little cost for Amazon.
- Amazon is losing money because it's investing like crazy in fulfillment centers, and other expensive things to stay 100 steps ahead of the competition. Amazon has found that cheap, fast shipping leads to a big jump in sales, so it's investing in making that possible.
- Amazon could turn a profit today if it stopped investing. Wei says Amazon turns a profit on almost all transactions. It posts quarterly losses because of its massive investments. A lot of people think Amazon will eventually be profitable when it has a monopoly on e-commerce and starts raising prices. That's wrong, it just has to stop investing.
It's not only a brilliant strategy but also brilliant execution.
After 20 years of building its lead, there's only a few companies with the resources to compete.
Walmart, Google, and possibly Apple.