Amazon started in 1994, initially as a catalog-based bookseller. The Internet allowed for improvements in reaching customers and Amazon developed a strong platform for electronic commerce, along with a fast delivery service. That platform now allows for a wider merchandise range that incudes apparel, electronics, books, recordings, sports and outdoor equipment, and auto parts.
Amazon offered other retailers the use of its commerce platform and some of its shipping capabilities if they sign up for “fulfillment by Amazon.” Hundreds of smaller retailers offer their merchandise on the Amazon platform in direct competition with Amazon. For example, if you search Amazon for a particular book title, you will be offered new and used copies of the book from both Amazon and several unaffiliated booksellers.
Amazon developed an affinity program called Amazon Prime that grew from 54 million members in 2016 to 63 million now. Prime members pay $99 per year to be eligible for free or reduced rate shipping and for free access to much of the Amazon Video streaming service (over the top movies and TV shows).
In 2016, Amazon bought 40 cargo jets and 4,000 truck trailers to gain better performance in its shipping logistics. Amazon now operates 28 sorting centers and 59 delivery stations feeding packages to local couriers. It operates more than 65 Prime Now hubs stocked with best-selling items that can be rushed to customers around the world. Some have speculated that Amazon may eventually compete directly against FedEx, UPS and USPS, but others think that expansion will not make economic sense for another decade.
The volume of Amazon’s transactions has honed the communications, storage and software that support its merchandise sales. Those capabilities were packaged into the Amazon Web Services (AWS) segment that supports other companies’ IT operations using the concepts of “cloud” and “software as a service.” The AWS line of business is the largest cloud business with sales of $4.5 billion last quarter from “start-ups, enterprises, government agencies, and academic institutions.” AWS faces stiff competition from other cloud businesses, including Microsoft, Oracle, Intel, Google, Alibaba, Baidu and Tencent.
Amazon Video’s streaming service competes against major streaming operators such as Netflix, Google, Hulu and Sling. Aside from those major streaming services, there are specialized competitors such as Acorn, Curiosity Stream, HBO now, CBS All Access and PBS. Disney plans to offer a streaming ESPN service and a separate platform for the rest of its electronic entertainment holdings. So far, Amazon Video is maintaining a retail price advantage albeit for a bland lineup of video content. The capital cost of creating or buying new content is daunting and competes for capital with all the other Amazon investment needs.
Amazon started its own grocery delivery business called Amazon Go in 2016. A year later it bought the Whole Foods grocery chain. Amazon is keeping the chain interesting by offering some Whole Foods price cuts. It also uses the grocery stores as staging points in its logistics network. The major grocery stores were rattled by Amazon’s entry as a competitor. Now, Walmart, Safeway and Kroger are mimicking Amazon’s use of stores for staging the delivery of Internet-ordered merchandise. Amazon’s planned entry into pharmacy services is rumored but not confirmed.
Aside from groceries, Amazon’s pattern for expansion has been to quickly enter high margin businesses where it can leverage its existing, efficiently operated investments. Its delivery arrangements are geared to consumers who value quick delivery and are the base for the Prime membership strategy that encourages existing customers to try products from its new lines of business.
Eventually, large competitors who operate fewer lines of business, but are more focused than Amazon, could develop marketplace advantages that Amazon cannot beat. This is likely to be Disney in the streaming field, or Walmart in groceries, or Google and Microsoft in cloud services.
So far, despite its mammoth size, Amazon does not seem to operate in ways that annoy consumers or make it a bigger target for regulation than other large businesses.