Amazon Web Services: A Resource-Driven Business Model That Makes Profits

I have a serious addiction for Amazon, as you might have noticed, and that's because I can get anything I want from there. Household products, my morning granular bars, electronics, anything. And it saves online shoppers like me a great deal of time. Here's how Amazon makes it work. Amazon's online marketplace displays the products that I can buy online. And it is powered by a robust IT infrastructure that handles the massive orders that come in. Once my order is made, Amazon picks up the item that I purchased from one of its warehouses where they store all the stuff they buy from manufacturers. Then this item is moved through Amazon's sophisticated logistics and transportation system to be delivered at my door within the week. Amazon makes money from slim margins on product sales. So that's their core online retailing business. But that's not all. When Amazon was honing its IT infrastructure to make it as sophisticated as possible, they realized other companies were probably making the same upfront investment to store data and run websites. So why not open their infrastructure to others and save them from the hassle of building one? It wasn't as simple as opening up a gate. Amazon had to invest in the development of their infrastructure to make it easy to use for anyone and also to make it secure. They also built an API to help users access the service. But eventually, their cloud computing services, called Amazon Web Services, solved a huge pain for companies from startups to large and complex companies like the CIA, Netflix, Etsy, and so on. They allowed them to use capacity and computing power from Amazon's infrastructure at variable costs. This entirely new high growth business that has nothing to do with online shopping was born from an existing resource that Amazon leveraged. Most people, especially investors, were pretty skeptical about Amazon's investments into aws. They would have preferred that Amazon focuses on improving the razorfin margins from their online retail business. But Amazon just proved them wrong. In their most recent financial report, they revealed that aws generated roughly $5 billion in 2014 and most of it in recurring revenues. More importantly, people were shocked to discover that AWS operating margins were nearly at 17%. According to estimates, this means AWS is a more profitable business than online retailing. But no one anticipated that. This makes us wonder if cloud computing is really the direction that Amazon will take to fix the weaknesses of its original business model.