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Jnan Dash

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Another Trillion $ company – Amazon

The second company to hit $1T market value was Amazon as its stock price reached past $2050.50 this morning. What an amazing journey this company had in only 23 years of life, younger than Apple, which hit its Trillion $ valuation a month back. Amazon’s value makes Jeff Bezos the richest man on earth at a whopping $166B worth with his 16.3% stake in the company.

Analysts cite the company’s ever-diversifying portfolio as a value driver. Last year, it launched into the grocery industry with its purchase of Whole Foods Markets. It is rounding out its hardware and logistics segments with last-mile deliveries, and it’s pushing forward in advertising to challenge Facebook and Google.

It’s important to understand the five markets Amazon operates in. The first segment is where Amazon is the primary supplier of goods such as books (that’s how it started). The second segment is where 3rd parties sell their goods via the Amazon platform. Then there is the subscription business which is growing nicely. The fourth segment is the advertising sector. Finally, the real star is the AWS segment for cloud computing.

Amazon’s cloud business, Amazon Web Services, is now on a $24 billion run rate. Importantly, sales at the cloud-computing division are accelerating, indicating that increased competition from Google and Microsoft isn’t slowing it down. Amazon is showing particular progress in signing long-term contracts with enterprises, a shift away from the pay-by-the-hour model it started in. Amazon reported a $16 billion backlog in AWS contracts with an average length of 3.5 years. AWS already produces strong margins — 26.2% over the last 12 months. That number continues to climb as the operation scales.

Amazon may be able to lock in customers longer as it leads the way in “serverless cloud computing” with AWS Lambda. Serverless cloud computing allows enterprises to easily switch to the public cloud by offloading server management to the cloud provider (for an additional fee). That means Amazon can increase its cloud revenue, its operating margins, and lock in customers for longer since there’s an increased opportunity cost for switching to a new provider. Just remember that Amazon started this business in 2006.

Over the last few years, Amazon has greatly expanded its subscription services. On top of Amazon Prime, its core shipping and streaming video subscription, Amazon also offers subscriptions for audiobooks (Audible), e-books (Kindle Unlimited), video (Prime Video, Amazon Channels), and music (Music Unlimited), among other things. Last quarter, Amazon brought in $3.4 billion from its various subscription services. The vast majority of that comes from its 100 million-plus Prime members around the world. Of course, that’s the subscription Amazon would most like to sell consumers since Prime members spend more, on average than non-Prime members on Amazon. Prime also creates a strong network effect, fueling both its third-party seller services and its advertising business.

This amazing growth is all due to the leadership of Jeff Bezos and his non-linear thinking to try new markets. Who would have imagined a book-selling company to be the pioneer in cloud computing?

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Jnan Dash is Senior Advisor at EZShield Inc., Advisor at ScaleDB and Board Member at Compassites Software Solutions. He has lived in Silicon Valley since 1979. Formerly he was the Chief Strategy Officer (Consulting) at Curl Inc., before which he spent ten years at Oracle Corporation and was the Group Vice President, Systems Architecture and Technology till 2002. He was responsible for setting Oracle's core database and application server product directions and interacted with customers worldwide in translating future needs to product plans. Before that he spent 16 years at IBM. He blogs at http://jnandash.ulitzer.com.