Amazon removing more cost centres


It’s quite rare in most industries for a market innovator to become the strongest company in the sector. Usually the market creator is overtaken by a more efficient competitor, who has more time to see what not to do. This has been the case with most industries, not just IT.

One of the first ecommerce web sites I remember using was Amazon. It reduced the cost of books by a huge factor and its recommendation engine is still seen as one of the best in any website. The fact that it launched in 1994 and is still one of the most profitable companies in the World is impressive.

In terms of financial scale, for UK readers, Tesco has a market capitalisation of £31bn and Amazon has a market capitalisation of $89bn. For US readers, Target has a market capitalisation of $35bn.

Turning costs into profits

One of the business initiatives that most people admire Amazon for is how they turn their costly IT organisation from a cost-centre to a profit centre – called AWS (Amazon Web Services). Essentially, running and all the international sites requires a massive amount of servers in data centres all around the world. When I visited one of our US data centres a few years ago we had an area (called a cage, because it is one) and our next door neighbour was a cage several times larger for Amazon.

Anyway, Amazon realised it had a huge IT infrastructure and converted the spare capacity into a facility enabling anyone else to use their infrastructure. Companies can rent this capacity on an hourly charge. And many companies do use it.

Amazon won’t release revenue figures directly, however some reports have estimated its more than $500m annually.


Another innovation that Amazon had to implement, this time by force was their Marketplace. eBay started taking some revenue away from Amazon, so Amazon started allowing third party sellers to sell products on Fast forward to the present time, and it’s quite often that a consumer will buy something on Amazon, which is actually another merchant – whether it’s a sole proprietor or a multi-national organisation.

If a consumer currently buys something from Amazon, if it’s actually Amazon who sell the product, it will come from an Amazon warehouse and be delivered directly. If it’s a third party seller, Amazon have a clever interface (and contractual terms) which notify the seller to deliver the goods within a set time period.

Removing more cost centres

However the latest area that Amazon is moving into is fulfilment.

Amazon is encouraging merchants who use its platform to send their stock directly to Amazon’s warehouse and Amazon will take care of the rest. They’ll fulfil (pick and package) the order and deliver it to the customer. So if you sold glass vases, you would instruct your supplier to deliver a pallet of vases to an Amazon warehouse and spend all your time and energy making the Amazon pages look as good as possible.

This is ingenious for a number of reasons:

  1. It turns Amazon from a traditional retailer who needs to buy a certain commitment of goods for x and sell at x + y% markup – into a risk free business because it doesn’t need to buy the goods up front
  2. To compete against this model becomes ever more expensive, because the sheer capital infrastructure costs are now prohibitive
  3. Amazon will increase its economy of scale for delivery costs
  4. It encourages merchants to use Amazon as the primary channel, because Amazon performing merchant’s fulfilment requires less overheads and easier.

The fulfilment model is an interesting concept, because it turns retail and distribution into a service and it moves a lot of the risk (of buying the items up front) up the supply chain from the retailer (Amazon) to the distributor.


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