#88 | Amazon Deep Dive | Inside The Everything Store Flywheel
If you think Amazon is just an online retailer, think again. From dismantling physical friction with the internet to building an infrastructure that makes everything from cloud computing to logistics look effortless, Amazon’s true power lies in its hidden, interconnected engine. Jeff Bezos’s long-term vision transformed the world’s shopping habits, but what’s next? How does Amazon defend its dominance, and what vulnerabilities could threaten its empire?
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Nothing in this podcast can be considered financial advice. This is for educational purposes only. We may hold positions in the businesses discussed. Do your own research.
1 SPEAKER_00: Welcome back to the Dutch Investors to a TDI deep
dive into what is arguably the most complex and misunderstood
economic engine of today's era.
If you're listening to this, you likely interact with this
company almost every day, perhaps without even realizing
it.
Whether you're ordering a replacement part for your
kitchen, streaming a movie on a rainy Tuesday, or even just
browsing a website that happens to be hosted on their servers.
You are feeding a flywheel that has been spinning for decades.
But today we are not looking at the retail website or the livery
fans.
Today we'll be taking a closer look at the Everything Store,
better known as Amazon.com.
Let's jump in.
To understand why Amazon even exists, we have to start with a
problem that is as old as civilization itself.
Friction.
For most of human history, commerce was defined by physical
limitations of geography.
If you lived in a small town, your choice of books, tools, or
clothing was limited by what a local shopkeeper decided to
stock on their shelves.
You paid a premium for that convenience, and you lived with
a restricted selection.
Historically, the relationship between a retailer and a
customer was one of gatekeeping.
The retailer held the inventory and the customer had the need.
And this created a massive asymmetry of information and
access.
Amazon was founded by Jeff Bezos on the radical idea that his
friction could be dismantled through, you guessed it, the
internet.
But it wasn't just about selling things online.
That's a common misconception.
The fundamental need this company solves is the easy
access to the long tail of human production.
Why should a reader in a small village have less access to
knowledge than a scholar in Manhattan?
Jeff Bezos realized that if you could aggregate enough demand in
one place, you could justify the massive capital expenditure
required to build a logistics network that makes the friction
of distance disappear.
In the current era, this problem solving has shifted from
physical goods to digital infrastructure.
Just as small towns lacked bookstores, startups
historically lacked the capital to build data centers.
And by creating AWS, Amazon Web Services, the company solved the
problem of computing friction, allowing anyone with a credit
card to rent the same level of scale that previously was only
reserved to the world's largest governments and corporations.
Amazon exists to be the world's infrastructure, a role it
performs by obsessively removing the costs of getting things done
for the end customer.
And before we dive into the business model, we have to go
back to the origin story.
The history of Amazon is a study of the Lindy effect, the idea
that the longer a non-perishable thing has survived, the longer
it is likely to survive in the future.
Amazon has survived the dark days of the dot-com crash, the
dot com bubble, multiple recessions, and a global supply
chain collapse, each time emerging larger and more
integrated.
Founded in 1994, the company appeared to be just another dime
of a dozen online retailer.
But the most important moment that defined Amazon's success
was not a specific product launch.
It was a cultural decision, made during the 1997 and 2001 era.
While all the other tech companies around the world were
chasing quarterly profits, squeezing as much money out of
the customer as possible, Amazon's management made it very
clear in their very first shareholder letter that they
would focus on the long term.
Now, anyone can say that, but they actually did it.
They essentially told the market we will be misunderstood for a
long, long time, and we will be okay with that.
If we had to point to one moment where Amazon's DNA was encoded,
it was in 2001.
The bubble had burst and capital was scarce.
Everyone and their mother suggested that Amazon should
raise its prices to show a profit and survive.
Instead, Bezos and its team did the opposite.
Inspired by the scale economy shared model of companies like
Costco and WISE, they lowered prices.
They realized that if they could pass their efficiency gains back
to the customer, they would create a loyalty loop that no
competitor could break.
And this was the moment the Amazon flywheel was set in
motion.
The second important moment occurred in 2006, with the
launch of AWS.
Historically, many believed AWS was created to sell excess
capacity from Amazon's retail service.
But this is a myth.
AWS was actually a solution to an internal problem, and as the
company grew, its engineering teams were spending more time
coordinating with each other than actually innovating.
They were reinventing the wheel for every new project.
So management decided to turn their internal tools into
standardized services.
By hardening these tools so their own developers could use
them efficiently, they created a product that the rest of the
world desperately needed.
And today, that internal solution provides more than half
of Amazon's operating profits.
So how does Amazon actually make money?
Now that we understand the history, we can take a look at
the engine.
If you look at the top line, it looks like a retail business.
But if you look at the bottom line, it's more of a technology
and services company.
Amazon operates a multi-sided platform.
Think of it as a digital landlord that also happens to
run a giant store on the ground floor.
Historically, the company made money by buying products at
wholesale and selling them at a markup, the 1P or online stores
model.
Today, that is just bait for the trap.
The real money is made in the services that sit on top of the
retail traffic.
You could say there are three revenue pillars.
Currently, about 62% of items sold on the platform come from
third-party sellers.
So that are sellers, which is different from first-party
sellers.
A first-party product is something Amazon sells, and a
third-party product is something someone else sells.
Amazon provides them all, and the sellers pay rent.
But it's a little more than just rent.
Sellers pay a referral fee, usually around 15%, a
fulfillment fee to use Amazon's warehouses, and increasingly
they pay for advertising, just to be seen by customers.
And today Amazon is capturing roughly 50% of every dollar a
third-party seller makes.
The next pillar is the cloud infrastructure, AWS.
And this is the high-margin heart of the business.
AWS provides the servers, databases, and machine learning
tools that run everything from Netflix to the CIA.
It's a pay as you go model, which sounds simple, but it
creates massive switching costs once a company's entire workflow
is built on Amazon-specific APIs.
In 2025, AWS generated$128.7 billion in revenue, still
growing 20% year over year.
Now the third pillar, and the fastest growing part, is the
advertising segment.
When you search for, I don't know, coffee maker, and you see
a sponsored result, that is pure profit for Amazon.
Because the customer is already there to buy, the advertising is
incredibly effective, and this revenue has exploded, generating
over$68 billion in revenue annually and growing fast.
Currently, around 37 to 38% of revenue comes from online stores
first party sales, around 24% comes from third-party sellers,
which is high margin, while first party sellers have more
volume but are lower margin.
AWS accounts for about 18% of revenue, which is a very high
margin and massive switching costs.
Advertising, around 10% currently, but it's the fastest
growing one.
And obviously, you have the subscriptions like Prime, which
is recurring revenue, about 7% currently, with over 240 million
members globally.
You can imagine the logistics side as a giant heavy concrete
slab.
It's very expensive to build and to maintain.
But the advertising and AWS segments are the advertising and
AWS segments are the high-pressure jets that lift
that slab off the ground.
Without the retail volume, the advertising probably wouldn't
exist.
And without the engineering challenges of retail, AWS
wouldn't have borne.
They are interconnected and interdependent parts of a single
organism, in this case Amazon.
Now that we understand how they built the castle, let's look at
the modes protecting it.
This is where we need to be skeptical.
Because is the mode really as wide as management says it is?
The most profound competitive advantage Amazon has is what
we've already mentioned skill economy shared.
In a normal business, which Amazon obviously isn't, as you
get bigger, you might keep the extra profit for yourself to
give to shareholders.
But Amazon does the opposite.
They take the savings from their massive scale and use them to
lower prices even further.
This creates a barrier to entry that is almost impossible to
hurl.
If a new competitor wants to challenge Amazon, they don't
just have to be better, they have to be cheaper while having
smaller scale, which is a mathematical nightmare for any
startup.
Another massive mode is the logistics mode.
Historically, Amazon was a customer of UPS and the postal
service.
In the current era, Amazon has become the logistics industry
itself.
In 2025, Amazon Logistics officially became the largest
domestic parcel carrier by volume in the United States,
delivering a staggering 6.7 billion packages.
So why is this a mode?
Well, logistics is a density game.
The more packages you have on a single street, the cheaper it is
to deliver each one.
Because Amazon controls the order and the delivery, they
have the ultimate density.
Legacy players like UPS are actually retreating from this
last mile commodity, delivery to focus on more lucrative B2B in
healthcare logistics because they cannot compete with
Amazon's unit economics.
However, if we look closely, we can see some cracks.
The retail mode is being attacked by a new breed of you
could call it dopamine commerce.
Chinese companies like Timu and TikTok Shop are bypassing the
traditional retail model entirely.
TikTok Shop moved$90 billion in merchandise globally in a single
quarter in 2025.
So while Amazon is a safety reflex for consumers, Timu has
an addiction reflex.
Timu's ability to use tax loopholes has allowed them to
ship unbranded goods at prices Amazon often cannot match.
Which is crazy to think about.
Amazon's search-based dominance could be in trouble in the
future.
Furthermore, in the cloud battlefield, the multi-cloud
trend is a real thing.
Historically, companies were happy to be all in on AWS.
But today, companies and CTOs are nervous about being locked
into a single provider.
They are increasingly using Microsoft Azure or Google Cloud
for specific tasks to avoid dependency.
While AWS growth has re-accelerated, the market is
moving towards a mature oligopolis.
Now this can also be a good thing in the long run, since if
there's just a single player, they could get fined for being a
monopoly.
So who knows, right?
We'll see.
A company, ultimately a collection of people, and the
incentives that drive them.
And Amazon's culture is legendary, but is it
sustainable?
Especially considering its current size.
Jeff Bezos famously said that it is always day one at Amazon.
Day two is stasis, followed by irrelevance and death.
To prevent day two, the company uses a set of 16 leadership
principles that are surprisingly influential in daily operations.
For example, frugality is why their office desks were
historically made of cheap doors.
And bias for action is why they are willing to fail at things
like the Firephone to find a success like Alexa or Prime.
A couple other examples are be obsessed about the customer,
learn and be curious, deliver great results, think big, and
hire and develop the best.
Just to name a few.
So let's briefly touch on management and skin in the game.
The transition to CEO Andy Jesse was a logical move.
He was actually architect of AWS.
Historically, Amazon has been one of the most
shareholder-aligned companies in terms of pay.
Jesse's base salary is just $175,000.
His real wealth comes from over 2.2 million shares that fast
over a 10-year period.
Jeff Bezos still owns roughly 8-9% of the company.
And 99.5% of compensation for Andy Jesse is linked to
performance.
There are no cash bonuses and they are entirely stock
incentivized.
And bonuses are based on the stock performance, which usually
is not a good thing, but in Amazon's case, it forces them to
keep innovating and keep day one active.
So we don't mind it, and looking back, they've done great so far.
But we have to ask, can this culture remain as the company is
so extremely large now?
Recent periods have seen large-scale layoffs and employee
complaints about a secretive low performance list.
Some observers argue that under Jesse, the company has focused
more on trimming the fat and operational excellence than on
the messy invention that defined the Bezos era.
If Amazon becomes just another efficient company, it may lose
the magic touch that allows it to enter and disrupt new
industries.
Definitely something to keep track of.
Now, let's talk about risks and opportunities.
What could kill Amazon in say 10 years from now?
And can it still become a 10-bagger from here?
Now, for the bear case, would say there are three main
killers.
First, the antitrust breakup.
The US government is increasingly skeptical of
Amazon's dual role.
You cannot be the referee, the platform, and the player selling
your own Amazon basics products at the same time.
In 2025, Amazon already faced special charges related to FTC
legal settlements.
2.
The death of search.
If generative AI changes how we find products, the search bar on
Amazon.com becomes less valuable.
More than 300 million customers already used the AI assistant
Rufus in 2025, showing there is a real shift.
3.
The logistics bloat.
Capital expenditures in 2025 have reached a staggering$131
billion.
If consumer spending slows, they could be left with a massive
physical network that is underutilized, turning their
greatest strength into a fixed-cost anchor.
On the flip side, the bool case or the tailwinds are massive.
Amazon Leo, also known as Project Kuiper.
This satellite internet project was rebranded to Amazon Leo in
late 2025.
With over 200 satellites already in orbit and surface beginning
in five countries in early 2026, it aims to plug broadband into
the high-margin AWS engine.
Another massive tailwind is healthcare.
Amazon's acquisitions of one medical and the pharmacy push
could turn a$4 trillion industry into a high-efficiency digital
product.
Lastly, advertising.
So how does the market value a company that refuses to show gap
profits?
Because historically valuing Amazon on PE ratios has been a
fool's errand.
If they wanted to show a PE of 10, they could simply stop
investing in new warehouses and satellites tomorrow, but that
would kill the flywheel.
The market has been willing to pay a premium for Amazon's
operating cash flow.
So here's our verdict of Amazon.
We still think Amazon is a high-quality business, in the
truest sense.
It still has a culture almost impossible to replicate, and a
logistical mode that has now surpassed the century-old
incumbents.
Net income from fiscal 2025 reached almost$80 billion, a
massive leap from the 2.7 billion loss just three years
earlier.
Now any investor shouldn't just look at net income.
We would recommend looking at operating profits, which is more
tied to the quality of the business and performance.
Amazon's transition to advertising AWS is largely
complete, but there is still more room in the tank.
The risk is that management becomes too focused on
protecting the castle and not enough on building the next one.
But given the incentives, it is hard to bet against the
Everything Store, and as long as they continue to share their
economies of skill with the customer, we think the flywheel
will keep spinning.
This was the Amazon TDI Deep Dive.
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