Itus Company Insight Series : The Long and Short

Amazon, with a market cap of USD 1.5Tr, has grown its wings and presence to every industry (across commerce, infrastructure, retail, logistics, media). When looks at Amazon, it seems like a series of unrelated bets working out well. It begets to ask the question, what was the thought process behind each move, and did it have an overarching strategy?

At the Sohn Conference in 2016, Chamath had broken down the transition of how Amazon had actually planned its growth. Amazon looked at its core business in 2005, and its income statement. What they went around building over the course of the next 10 years, was to transform each line item in their income statement to a separate business which actually gave them a multiplier in terms of revenues.

What does this mean?

One of the largest line items in terms of their expenses was product costs – remember in ’05, Amazon was selling books online as its primary business. They transformed this into a product and a business line around Amazon Kindle. Their biggest optionality came through when they transformed their technology and infrastructure costs into their AWS business which they rented to the rest of the world. Today, this is their biggest cash cow on its balance sheet.

So while one looks at Amazon, and says a lot of what Amazon does, is unrelated diversification, behind the lines – each product/infrastructure/business line has been built around transforming their expense lines into revenue centres. This at its very core, has been one of the reasons why they continue to compound wealth for shareholders.

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