In his 1999 shareholder letter, Jeff Bezos discussed a then-recent event at Stanford University, where a woman asked what he called a great question: “I have 100 shares of Amazon.com. What do I own?”
Most CEOs would likely respond in the conventional way, saying she owned a fraction of the business, and perhaps add she will receive a portion of the company’s capital appreciation and profits.
Bezos, however, is not most CEOs. He told her she owned a piece of “the leading e-commerce” platform. This platform, he said, is comprised of:
- Brand.
- Customers.
- Technology.
- Distribution capability.
- Deep e-commerce expertise.
- A great team, passionate about innovation and serving customers.
He added that Amazon shareholders were also starting the year 2000 with:
- 17 million customers (this was just five years after founding).
- A worldwide reputation for customer focus.
- The best e-commerce software systems.
- Purpose-built distribution and customer service infrastructure.
All of that, Bezos argued, put them at a “tipping point,” where the platform would allow them to:
- Launch new e-commerce businesses faster.
- Provide a higher quality of customer experience.
- Lower incremental cost.
- Reach a higher chance of success.
- Have a faster path to scale and profitability than any other company.
From there, he continued to describe his vision of a company that is the most customer-centric, where customers can find anything they want online.
Notably, he goes on to say that Amazon will not do this alone, but with “thousands of partners of all sizes.” This statement of nearly 20 years ago proved prescient. In his 2017 letter (released in early 2018), Bezos reported: “Millions of small and medium-sized businesses now sell their products through Amazon to reach new customers around the globe.”
That 2017 sentence underplays an important but little-known aspect of Amazon’s strength: creating opportunities for small and medium-sized businesses to sell in other countries. It suggests Amazon has created its own massive and growing free-trade zone.
The 1999 letter goes on to say: “this platform affords an unusually large scale opportunity,” again foreseeing a company that will grow immensely. In 2017, Amazon generated $177.9 billion in net sales, equivalent to being the 55th richest nation in the world.
In his book, “The Amazon Way: 14 Leadership Principles Behind the World’s Most Disruptive Company,” John Rossman dedicates an appendix to explain what a platform is and how it differs from a business model or other structure.
First, he points out, platform has a technical definition; it is more than just a buzzword that can be applied to any would-be trendy business model. It is a more comprehensive change than simply adding a technological piece. Some characteristics of a true platform model are:
- Mainly fixed costs: most capital expenditure and research and development occur in setting up the platform; once built, it costs little or nothing to add new users.
- Marginal costs: those few that exist decrease over time as more users adopt the system.
- Hidden platform: end users normally do not know the platform exists. As an example, Rossman notes that few Netflix (NFLX) users know their content is hosted on Amazon Web Services.
- Revenue model: revenue comes in a “more continuous” stream and in smaller amounts, when compared with lumpy quarterly collections. More recurring and subscription revenue (again, consider Amazon Web Services).
- Long-term strategy: platform businesses take longer to get up to speed than conventional businesses and require diligent planning and design before launching.
At the Pipes to Platforms blog, Sangeet Paul Choudary explains that "pipes" and "platforms" are two distinct models. He says Amazon began using the pipe model, in which it sourced products, managed inventory and sold them to customers. Essentially, it took conventional retail online.
When Amazon wanted to add reader reviews, however, it adopted the platform model. In this model, Amazon became a facilitator rather than principal: it brought together consumers who created reviews and buyers who would read the reviews. Choudary says, “A business using Pipe Thinking would just have sourced expert reviews but Amazon used Platform Thinking to create an entirely new source of product reviews.”
He also says platforms are intelligent: the more users of a system, the more valuable it becomes to all users because of the data that has been collected. For example, Platform Thinking allowed creation of the “Customers who bought this item also bought” feature, which allows cross-selling.
In each of the early years of the shareholder letters, Bezos included a paragraph that looked like this one: “In 1999, we continued to benefit from a business model that is inherently capital efficient. We don’t need to build physical stores or stock those stores with inventory, and our centralized distribution model has allowed us to build a business with over $2 billion in annualized sales but requiring just $220 million in inventory and $318 million in fixed assets. Over the last five years, we’ve cumulatively used just $62 million in operating cash.”
Parsing that paragraph produces several statements about the power of the Amazon platform:
- The business model is “inherently capital efficient” because it allows Amazon to increase its volume disproportionately to its costs; it can scale up revenue and profits while scaling down the cost of sales. Brick-and-mortar systems obviously require real estate, for both selling and inventory.
- Expanding into new geographical areas does not bring with it a requisite need for new physical infrastructure; adding a new server or two at a cost of a few thousand dollars is probably the equivalent to spending a million dollars on new brick-and-mortar facilities.
- As Bezos says, Amazon has been able to build a system with the capability of handling more than $2 billion in sales for just $220 million in inventory and $318 million in fixed assets. Conventional retailers must have held their heads and wept on seeing such margins.
Wrapping up, let’s first hope that the woman who owned 100 Amazon shares in 1999 held on to them. Accounting for three stock splits in the late 1990s, she would own 1,200 shares. At the close of trading on May 2, the stock closed at $1,576.29—making the current value of those shares $1,891,548.00.
A platform is more than just a fancy name or buzzword; it is a unique business model in which a company invests a relatively large sum up front. In exchange for the early commitment, a company can expect to operate with minimal variable costs. Further, if that company can stay afloat during the early years, it should reap above-average returns once established.
A platform grows in value as more users participate. Amazon used its platform originally to connect buyer reviews with prospective customers, a function more complicated than it might seem. Further, a platform can be expanded infinitely (theoretically, at least) by "bolting on" or integrating new applications.
Beyond the technology, Amazon connected book readers from around the world with authors and publishers around the world. It then went on to expand that "free trade zone" to just about any physical or electronic product. Consumers have become more empowered than ever, and take advantage of that with millions of transactions every day.
Finally, the platform has provided shareholders with additional wealth from satisfying consumers and from leveraging the power of the platform. For everyone but competitors, it has produced a win-win-win.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
