CHAPTERCASE 8 Part II AMAZON WEB SERVICES (AWS) is by far Amazon's most Amazon currently brings in amazon profitable business endeavor: Amazon's total revenues stood $10 billion a year, and holds at some $240 billion in 2018, with retail bringing in $203 bil- some 10 percent market Mike Kane/Bloomberg/ lion, AWS $27 billion, and online advertising the remaining share, far behind Facebook Getty Images $10 billion. Amazon's profits were $12 billion, with AWS and Google, the dominant bringing in $7 billion and retail just $5 billion. Thus, AWS's players in digital advertising. Yet, Amazon's digital ad busi- profit margin is approximately 26 percent while the online ness has been growing by 90 percent year over year. Although retailing profit margin is a mere 2 percent. Indeed, while most searches in the United States are initiated on Google, Amazon is barely profitable in its online retailing operation Amazon is the leader when looking at the more narrow cate- in the United States, it is losing money internationally. At the gory of product searches. This implies that most U.S. con- same time, AWS is growing by more than 40 percent a year. sumers begin an online product search directly on Amazon. Given its hugely successful business, AWS has become Ama- As such, Amazon has been described as "a search engine zon's cash cow, which allows Amazon to undertake various with a warehouse attached to it."79 strategic initiatives such as paying $14 billion for Whole Amazon might be in the best position to take advantage Foods Market (in 2017) and funding the money-losing inter- of the future exponential growth in digital advertising be- national retail expansion as well as original content develop- cause it has the best quality data. While Google knows what ment for Prime Video (see Exhibit 8.1 for more examples of people search for in general terms, Amazon knows what each recent strategic initiatives). individual views, buys, listens to, watches, and how and when Despite these efforts, some clouds are gathering on the each individual communicates with Alexa. These data will horizon over Amazon. Although AWS is growing fast, its allow Amazon to provide the most fine-grained and targeted growth rate has slowed in recent years. Moreover, with Mi- ad placements, which will garner a premium from advertis- crosoft's Azure, Google's Cloud, as well as IBM's and now ers. And the more data Amazon has, the more it can boost its Apple's stronger push into cloud computing, competition is online sales. Once positive network effects kick in, Amazon heating up. In addition, many competitors such as Netflix-a might be the winner in the digital ad space-especially in re- current customer of AWS-may shift to Azure or another gards to products. cloud services provider for strategic reasons. Moreover, al- though offering one-day free shipping for Prime members Questions raises the bar on customer service to which Walmart and oth- 1. Describe Amazon's diversification strategy using ers need to respond, it does not come cheap. The investment Exhibit 8.8. What type of diversification strategy is to make one-day free shipping a reality in the United States Amazon pursuing? Explain. alone is estimated be between $800 million and $1 billion. 2. What is Amazon's core business? Is AWS related to Given that Amazon's retail operation is barely profitable that Amazon's core business? Why or why not? Some inves- money must-at this point-come from AWS. tors are pressuring Jeff Bezos to spin out AWS as a As mentioned, AWS's growth rate is declining. Therefore, standalone company. Do you agree with this corporate Amazon must create another growth engine to finance future strategy recommendation? Why or why not? Hint: improvements to customer service and other diversification Do you believe AWS would be more valuable within experiments. One candidate is online advertising, where Amazon or as a standalone company