Gennaro Cuofano's Blog, page 210

March 6, 2020

What Is Financial Accounting? Financial Accounting In A Nutshell

Financial accounting is a subdiscipline within accounting that helps organizations provide reporting related to three critical areas of a business: its assets and liabilities (balance sheet), its revenues and expenses (income statement), and its cash flows (cash flow statement). Together those areas can be used for internal and external purposes.

Financial Accounting Origin Story

When humans lived in the savannah, they lived in small groups, which would consist approximately of no more than a few dozens of individuals.

Through the millennia the human tribes evolved in groups that became larger and larger until they became societies.

Societies are characterized by large groups of people that interact on a daily basis.

Those people are in some way associated with religion, culture, and commerce.

While religion and culture evolved mainly by word of mouth, commerce instead needed to develop other (more complicated) tools to thrive.

In fact, if a little society is comprised of a few hundred merchants; and if we consider all the possible interactions that could happen between them, they would easily amount to millions of transactions.

Therefore, the sole word of mouth wasn’t sufficient for keeping track of all those transactions. That is where “writing” came handy. The ancient Mesopotamian merchants, thus, started to develop tools that would allow them to track all the goods exchanged.

This evolution continued up to Middle Ages Florence. At that time, Florence was a metropolis (we can compare it to modern New York), and commerce had boomed.

In fact, merchants from all over the world flowed into Florence to buy and sell any goods.

The commercial routes between Florence and Venice were quite trafficked. Not surprisingly Florentine merchants had to come up with a tracking system that would allow them to consistently keep up with the millions of transactions taking place in Florence.

Most probably the Florentine merchants initially came up with several systems for tracking those transactions.

Thus there was no standard or consistency. Somehow by the fifteen century, a tracking system called “double-entry” (developed in Venice) took over and became the most used accounting system at that time.

Who was the father of the Double-Entry System?

Luca Pacioli (a mathematician and Franciscan Friar from Tuscany) formalized the double entry in his Summa de arithmetica, in 1494.

In his work Luca Pacioli tells us that any business to be successful necessitates of three things:

Capital (cash or credit)
A good accountant
A good internal system.

For “capital,” Pacioli, intended mainly cash (he understood way before than Franklin that “cash was the king”), but also credit.

In other words, Pacioli believed that trust was the pillar of any business.

He used the word credit because it comes from the Latin word “credo,” which means, “trust.”

The second and third aspects are crucial as well. In fact, a good accountant has to have a basic understanding of mathematics (very basic). And he has to be able to effectively use an internal system, which he calls a double entry system.

That system became the official system of the western world. And it is still in use today.

How does it work?

Double-Entry System in a Nutshell

The double entry is merely a tracking system. Each transaction is classified according to two entries (hence it is called double-entry): debit and credit.

In short, like computers language is expressed in bits, which consist of a bunch of 0s and 1s, accounting language is expressed in debits and credits.

What do those terms mean? Debit comes from the Latin “debitum,” which simply means, “What is owed.” Credit instead comes from the Latin “creditum” that can be translated as “having been loaned.”

But what is owed or loaned? The only good exchanged in the accounting world is money.

Therefore, when we say debit and credit, it always refers to assigning a $ amount to the goods or services sold or bought by the organization.

Therefore each time a transaction needs to be recorded in the accounting journal (so-called General Ledger) the money needs to be debited to an account while credited by another account. In this way the transaction balances.

Before you can record your first transactions, you must have a basic understanding of the primary financial statements: balance sheet and income statement.

Financial Statements in a Nutshell

The central premise of accounting is to keep track of a bunch of transactions taking place in a particular period. For some reason, the double-entry system prevailed.

This system says that each time you record a transaction, you must debit one account and credit another account. But what is an account?

An account is merely a way of classifying different transactions. In fact, in bookkeeping exist five main accounts:

Asset
Liability
Equity
Revenue
Cost

What is an asset?

In short, the assets are all those resources that the company has at its disposal to run the business in the short and long term.

What is a liability?

The liabilities instead are mainly the money borrowed to acquire those resources.

What is equity?

Not all the resources (assets) are acquired through debt (liability). In fact, you may invest some of your money into the business to buy the machinery or other stuff that will help you to run it.

In this case, the money you put into the business is called equity. That’s it.

The accounting equation

For instance, if you open an ice-cream shop, you will buy the machine (asset) by borrowing some money from the bank (liability) and by putting some of your money (equity).

Consequently, the value of your machinery (asset) will be equal to the borrowed money (liability) plus your own money (equity). From here the so-called accounting equation A = L + E.

What is a balance sheet?

Those three accounts (Assets, Liability, and Equity) comprise the so-called Balance Sheet. Thus, for any given instant of the life of your business, the balance sheet will tell you what the $ amount of assets the company owns is and how those assets have been acquired (Either through debt, also called liability or through equity, also called capital).

Consequently, the $ amount of liability and equity must balance with the $ amount of assets the company owns. Pretty straightforward! Isn’t it?

If you didn’t get it yet, don’t worry we are going to see some beneficial practical examples.

Knowing how much assets, liabilities, and equity the company owns or owes at each instant, (in accounting lingo) is called “financial position.”

What Is a Financial Option? The Complete Beginner’s Guide to Financial Options

What Are Revenues and Costs?

On the other hand, we are still missing two accounts: revenue and cost.

The revenues are merely the money flowing into the business at any given period. The costs are all the expenses flowing out at any given period.

The costs can be broken down in several ways. By subtracting the costs to the revenues of the business you get what is called Net Profit/Loss; which in accounting jargon is also called “bottom line.”

Those two accounts together form the so-called “Income Statement.” Accountants use a lot of other names for it (Profit and Loss or Statement of comprehensive income), which all mean the same thing.

What is the purpose of the income statement?

Therefore, the primary purpose of the income statement is to show how much money went in and out and if the balance was positive or negative. Keep in mind that “money” does not mean “cash.” in fact, often accounting runs on an “accrual basis.”

It simply means that transactions are recorded in the income statement independently from cash disbursement. Cash basis, instead, indicates that transactions are recorded only when cash is passed from hand to hand.

To have a detailed understanding of the income statement, you can watch this short video:

If you followed along so far, you should be able to get to the final step: recording transactions

What is the purpose of the accounting discipline?

We saw that the accounting equation’s primary purpose is to keep things in balance. It makes perfect sense. In fact, in the real world, if you put $5 in your pocket, you will still find $5 (unless you are a magician, which in the accounting world is called “fraudster”).

Things get a little bit trickier in accounting. Keep in mind that the double entry system has been designed to understand where the money came from. Imagine the case in which you have a $100 bill.

You put it in your pocket. After a few weeks you take it out, but you completely forgot where it came from. Did I borrow it from someone? Was it money I saved? Did anyone pay me for the work done?

You don’t have an idea!

While you can afford to let this happen in the real world, this must never happen in the business world. Companies often buy and sell hundreds of goods or services. This generates a huge volume of transactions. Thus, knowing where anything comes from it is crucial for three main reasons:

Internal control
Tax compliance
Performance measurement

First, as you can imagine companies without an efficient system that keeps track of all their transactions would not be able to know what happens within the organization. This can lead to frauds, bad management and so on.

Second, the government also requires companies to submit their tax returns. To do so, businesses must keep track of all their transactions and know how to classify them.

Third, another branch of financial accounting (ratio analysis) is also crucial to understand how the business is managed from several perspectives.

Time to Master the Accounting Game

So far we saw that the accounting world uses two main documents (balance sheet and income statement) to answer two central questions:

First, how much of my assets have been acquired through debt and capital?
Second, are my assets generating a net profit or a net loss?

By answering the first question, we can determine the financial position of the organization. By answering the second question, we can understand if the assets we bought are generating profits.

Hence, we can determine if it is worth to go on with the venture. A third document is crucial to understand the business performance as well (the cash flow statement). Yet, if you master balance sheet and income statement you are on the right path to developing more profound business acumen.

The two questions above are crucial to understanding how to record transactions in the accounting books. Hence, we will do this exercise by thinking about situations that may present in your life. This time though each time you put a $100 bill in your pocket you have to answer the two questions above. Let’s start then, action!

Financial Accounting Case Study

You are broke, 0$ in your pocket! But you have to pay the rent! It amounts to $500. The landlord is coming tomorrow. How do you fix this situation? Although you are a grown-up, it is an emergency situation.

Thus, you put your pride aside and ask your parents. They love you of course. Therefore, they give you the money. We are going to assume that your right pants’ pocket is a venture. We will call it “Broken Inc.”

Broken Inc. has now one shareholder (yourself) and a bank (your parents). How do we record this transaction in the accounting world? Easy.

Do we have to answer the first question: how did we acquire that money? Since your parents gave them to you, we will assume that you are proud enough to give them back, once you earn them.

Thus, we will consider $500 as a loan. According to the accounting equation, Assets are on the left side, while Liability and Equity on the right side:

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To record transactions, accountants use a visual aid called T-Entry (nowadays it’s all done automatically by software. This may seem a good thing, but often it’s not. When folks don’t take the time to understand how accounting works from its foundation screw-ups are guaranteed in the long run):

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As you can see on the left side we have debit and on the right side credit. This means that each time we want to show that our assets increased we just debit them (remember assets are on the left side of the accounting equation) and vice versa.

Instead, each time we want to show that our liability or equity increased we just credit them (remember that liability and equity are on the right side of the accounting equation) and vice versa. To recap:

To show an increase in assets we debit them. To display a decrease in assets we credit them:

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To show an increase in liability or equity we credit them. To show a decrease in liability or equity we debit them:

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We can now put things together:

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Let’s record the transaction. Broken Inc. received $500. It is a loan. This means that now in Broken Inc. bank account (your pocket) there is $500. But it is a loan. In fact, they will be given back to the bank (your parents).

We will record the transaction in the following way:

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Therefore, your pocket (which is your cash account) will be debited. Why? It is a short-term asset. On the other hand, we will credit the $500 to an account which I arbitrary called “Parents’ Loan.” Why? It is a liability.

In other words, we showed that your cash account increased by $500. But we also know why that happened. Your parents gave you the money. Hence, once you will go back in few weeks time and look at Broken Inc. balance sheet, you will know where the $500 came from.

As you can see from the image above, the T-Entry is immediately translated into your balance sheet. In fact below the t-entry, the balance sheet (BS) shows that you have $500 in assets but also $500 in liability.

Thus even though, in the present, you have $500. You know that in the future you must return them back.

Remember those are virtual transactions. It means that they take place only in your accounting books. In reality, you have $500, and that’s it! But accounting is a little bit trickier than reality because it needs to answer the two questions we saw at the beginning of the paragraph.

What Is a Financial Ratio? The Complete Beginner’s Guide to Financial Ratios

Broken Inc. Is Temporary Unbroken

In Scene One your parents saved your rear. The landlord is knocking at your door. He will ask for the rent. The only liquid money available will disappear in a few minutes. For now, though you don’t worry too much.

You open the door, and the landlord is already with his hand forward waiting for the $500. This means that you will put the hand in your right pants’ pocket. We will consider the rent’s money as an expense that Broken Inc. is incurring.

In fact, expenses are often connected with the assets. For such reason on our income statement, we will place them on the left side. On the other hand, we will place the income on the right side. In other words, our income statement will look like the following:

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This implies two things:

To show an increase in expenses, we will debit them (they are on the left side of the t-entry) and vice versa.
To show an increase in revenues, we will credit them (they are on the right side of the t-entry).

Thus it will look like the following:

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You have the insight to record the transaction now. Since you paid the rent to the landlord, this is a “rent expense.” yet to pay it by withdrawing the money from Broken Inc. pocket account. Therefore:

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As you can see in the upper part, we recorded the transaction. We showed an increase in rent expense by debiting it and a decrease in Broken Inc. Pocket (asset) by crediting it.

On the below part you can see how your financial statements look like (balance-sheet + income statement are called so). Thus, the Income Statement (IS) shows a net loss of $500, while the balance sheet (BS) shows only $500 in liability.

There is something wrong here. Do you notice anything? Not yet? Let me give you an insight. It is not by chance that the “balance” sheet it is called so. In fact, it has always must balance. Always!

Therefore, when you see the asset side showing a different amount compared to the liability + equity side, something is wrong. In this case, nothing is wrong. We just missed a step.

In fact, to match the asset side with the liability & equity side of the balance sheet, we have to connect it to the income statement. How?

We must report the losses in the equity section of the balance sheet. In fact, in accounting when you have a net loss on the income statement, it will also be shown as “accumulated loss” on the balance sheet. Once we do so the BS will balance out:

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As you can see the liability and equity cancel each other out. Therefore, eventually, your balance sheet will have $0 in total assets and $0 in liability plus equity (the parent’s loan cancels out with the accumulated losses, which makes the equity account negative).

Broken Ink. is in financial distress again. It is time for you to fix its finances since you are its greatest assets. It is time to earn some money!

Fixing the Finances of Broken Inc.

You decide to pay back to money your parents gave you to pay the rent. Therefore, you look for a job and finally find it. You will be working as a waiter in a restaurant, earning a fixed salary of $1,000 per month.

Mr. Sal agrees to pay you in advance (he is very kind). Thus, you finally get the paycheck. The paycheck is going to be income for Broken Inc. Finally, you will not show a net loss. Thus, you record the transaction on Broken Inc. accounting books:

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As you can see in the upper part, we recorded the t-entry. In short, we debited Broken Inc. pocket to show that the cash account increased by $1,000. Also, we credited the salary account to show that it increased by $1,000.

As you can see below the t-entry, the entry on the left (Broken Inc. pocket account) is translated on the balance sheet. The entry on the right (salary) is translated on the income statement.

Since the salary offset the rent expense, you now have a net profit of $500. That net profit was also translated on the balance sheet as accumulated earnings. Neat!

Finally, Broken Inc. paid all its debts, and it has a $500 surplus. Don’t you think it is time to pay back your parents’ loan?

How to Balance a Balance Sheet: Balancing Things Out

You proudly walk toward your parents’ house. In a week things have changed. You grew up and learned the lesson. It is time to repay your parents. You get in the house. Your mother is in the kitchen. She is cooking for you.

You sit at the dinner table and announce your parents that you found a job. Therefore, you give them back the $500 they borrowed you. Broken Ink is 100% yours now! You are your own master. Let’s see how to record the last transaction:

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As you can see we debited the Parents’ Loan (liability) to show its decrease. On the other side, we credited the Broken Inc. Pocket account (asset) to show its decrease.

This transaction only affected the balance sheet. In fact, the left side of the t-entry zeroed out the loan. The right side of the t-entry resulted in a $500 decrease of the same account.

The income statement was unaffected. In short, Broken Inc. has $500 in cash, which are all yours, since those are accumulated earnings. Congratulations!

Summing up and Conclusions

Throughout this short manual, we saw that accounting was already used in ancient Mesopotamia. The double entry system though was developed in Venice but formalized for the first time by a Tuscan mathematician, Luca Pacioli.

In his work, Summa de Arithmetica, Pacioli delineated the three most important aspects of any business:

Capital (cash or credit)
A good accountant
A good internal system.

Also, we saw that the two main documents that describe the situation of any business are the balance sheet and income statements. Together they form the so-called financial statements. Those two documents classify the accounting transactions under three main accounts:

Asset
Liability
Equity
Revenue
Cost

Assets, Liability, and Equity are shown under the balance sheet, for which the primary purpose is to show the financial position of the organization. The “balance” sheet is called so because the Asset side always has to match up with the Liability and Equity side.

From this premise we get the accounting equation A = L + E. after that, we have the income statement, which classifies the transactions in Income (or revenue) and Cost (or expense).

Its main purpose is to show whether the business has a net profit (total revenue are higher than total costs) or a net loss (total expenses higher than total revenues). Together those two statements answer two central questions:

First, how much of my assets have been acquired through debt and capital?
Second, are my assets generating a net profit or a net loss?

What Is a Financial Option? The Complete Beginner’s Guide to Financial Options

Other business resources:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know
The Complete Guide To Business Development
Business Strategy: Definition, Examples, And Case Studies
What Is a Business Model Canvas? Business Model Canvas Explained
Blitzscaling Business Model Innovation Canvas In A Nutshell
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained
What Is Market Segmentation? the Ultimate Guide to Market Segmentation
Marketing Strategy: Definition, Types, And Examples
Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
How To Write A Mission Statement
What is Growth Hacking?
Growth Hacking Canvas: A Glance At The Tools To Generate Growth Ideas

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Published on March 06, 2020 14:15

February 29, 2020

The State Of Business Technology [2020 Report]

Business technology is the whole new ecosystem spurred by the advancements started with the PC era, going forward the Internet and Web era, which together created new monopolies that just a few decades ago didn’t exist. Those tech monopolies locked in digital distribution in several new industries.

Methodology

In this report, we’ll analyze the current business tech world by looking at five business wars. Based on the outcome of those “wars” new industries will arise, new players will emerge, and old monopolies might fall, while others might emerge.

Before we get to it, one point is important to stress. There is no business analysis that can predict the future. And while this analysis itself is plenty of data, and what might seem facts, this is one interpretation of the current business events.

As such, if you like this story, take it just as is, a business story of our times, nothing more. If you’ll get inspired by it to build your next business or to actually take action on your current business, that’s great.

Yet, this is also a story in its own sake. Our times are so interesting because they make use questions many assumptions about the past, and they also make us build new assumptions about the future.

Being part of this dialogue is important so that we can all shape it.

Where do we start?

We’ll look at the current business tech landscape by analyzing six main tech giants who work as gatekeepers to entire industries and can potentially open up whole new markets. We’ll call them FAAMNG a variation of FAANG.

FAAMNG comprises Facebook, Apple, Amazon, Microsoft, Netflix and Alphabet’s Google.

What is the business model?

[image error]A business model is a framework for finding a systematic way to unlock long-term value for an organization while delivering value to customers and capturing value through monetization strategies. A business model is a holistic framework to understand, design, and test your business assumptions in the marketplace.

On FourWeekMBA I’ve covered hundreds of business models. There is no single definition to it. As with any concept that lives in the real world, business modeling is a dynamic concept.

As an entrepreneur business model frameworks might help you define the key building blocks of your business or the kind of business you might want to build. As business theorist a business model it’s the most important entity

Investors look at business models to help assess the scalability and viability of an organization. As a practitioner, the business model can be any of the concepts above.

In this report, we’ll glance at the business model of each of the FAAMNG players to have a first overview on which we’ll build up the landscape to analyze.

What business wars might shape the future?

For the sake of this report we’ll take into account five wars:

Advertising wars Mobile wars Voice warsStreaming warsCloud wars

Some of those business wars are tied and integrated. Advertising wars can’t be analyzed separately from the mobile wars, as attention is mostly on portable devices and who’ll surf the wave of mobile attention will mostly win the advertising war in the coming years.

Some other wars are also shaping the whole new ecosystems. For instance, the cloud and voice wars are also enhancing the AI Economy, to give rise to the next multi-trillion-dollar economy.

The gatekeepers

The web worked as an open force, that enabled new companies to take over and create a whole new way of doing business. In this era, companies that barely existed previous to the web (except for Microsoft) first unlocked digital distribution, then locked it in. Thus, creating a new center of powers.

Those companies are now the new gatekeepers which consolidated and in a way, locked in the digital distribution pipelines:

FacebookAmazonApple MicrosoftNetflix Google

Facebook business teardown

[image error]Facebook is an attention-based business model. As such, its algorithms condense the attention of over 2.4 billion users as of June 2019. Facebook advertising revenues accounted for $31.9 billion or 98.66% of its total revenues. Facebook Inc. has a product portfolio made of Instagram, Messenger, WhatsApp, and Oculus.

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Amazon business teardown

[image error]Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure.

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[image error]The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

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Apple business teardown

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Microsoft business teardown

[image error]Microsoft has a diversified business model spanning across Office products, Windows, Gaming (Xbox), Search Advertising (Bing), Hardware, LinkedIn, Cloud and more.

Netflix business teardown

[image error]Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. The company is profitable, yet it runs on negative cash flows due to upfront cash paid for content licensing and original content production.

Google business teardown

[image error]Google has a diversified business model, primarily making money via its advertising networks that, in 2019, generated over 83% of its revenues, which also comprise YouTube Ads. Other revenue streams include Google Cloud, Hardware, Google Playstore, and YouTube Premium content. In 2019 Google made over $161 billion in total revenues.

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Published on February 29, 2020 14:32

February 22, 2020

Amazon Case Study: Why from Product to Subscription You Need to “Swallow the Fish”

In this article, we’re going to see an interesting case study and how Amazon seems to be changing its business strategy.

In fact, since 2014 Amazon has been pushing more and more from a solely product-based

We’ll see how and what this implies.

The power of the subscription business model

On this blog, we covered at great length the power of the subscription business model.

Many tech companies are switching from a product-based business model to a subscription business model.

In part, this is due to the fact that cloud technologies offer themselves for consumption. In part, that is also a mindset shift from ownership to usage.

For instance, Amazon is pushing to bring as many people as possible to become part of their Amazon Prime Program.

This isn’t by chance. In fact, Amazon has been investing massive resources to enhance their membership revenues. That’s also the reason why Jeff Bezos said: “When we win a Golden Globe, it helps us sell more shoes.”

In fact, Amazon is investing billions of dollars in their Studios to develop as much original content as possible in order to attract as many subscribers, within the Amazon prime program.

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In 2017, Amazon revenue generation still saw its online stores as the primary source of income.

However, there are two important aspects to point out.

First, as Amazon uses the so-called cash machine revenue generation, which implies tight profit margins.

In short, Amazon leverages on its inexpensive prices, to hook as many people as possible to the Amazon marketplace.

Second, even though subscriptions still represent only 5.47% of Amazon total revenues, they grew exponentially since 2014:

[infogram id=”affe48d5-0cb8-4e93-a2fe-b8a7331dadc6″ prefix=”ISZ” format=”interactive” title=”Evolution of Amazon revenue generation model”]

As pointed out on Amazon 2017 annual report, in relation to Amazon Prime:

13 years post-launch, we have exceeded 100 million paid Prime members globally. In 2017 Amazon shipped more than five billion items with Prime worldwide, and more new members joined Prime than in any previous year – both worldwide and in the U.S. Members in the U.S. now receive unlimited free two-day shipping on over 100 million different items. We expanded Prime to Mexico, Singapore, the Netherlands, and Luxembourg, and introduced Business Prime Shipping in the U.S. and Germany. We keep making Prime shipping faster as well, with Prime Free Same-Day and Prime Free One-Day delivery now in more than 8,000 cities and towns. Prime Now is available in more than 50 cities worldwide across nine countries. Prime Day 2017 was our biggest global shopping event ever (until surpassed by Cyber Monday), with more new Prime members joining Prime than any other day in our history.

That is also why Amazon is doubling down with initiatives like Amazon Prime Day:

What can we expect from this change in business strategy?
The fish model explained

Changing a business model isn’t a simple or linear process.

Instead, that is a process that requires tinkering, experimentation and most of all long-term vision.

In fact, it isn’t surprising to see revenues and profits fall when companies switch their focus from a product-based to subscription based.

This process is called fish model:

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Source: tsia.com

As explained on tsia.com:

Whether you’re a traditional tech company making the pivot to the Cloud or a born-in-the-cloud business, there’s a financial “fish” in your future that you will need to swallow.

In short, in transitioning the business toward the subscription model an initial decrease in revenues and an increase in costs will be experienced. This financial situation takes the shape of a fish.

Until – as pointed out on tsia.com -“you begin to transition from the money-losing, rapid-growth phase to a more steady-state pattern of slower (but profitable) growth.“

Key takeaway

Many tech companies are experimenting with new business models. This is a normal process.

In fact, as economic, technological, socio-cultural scenarios change, companies need to adapt at a aholistic level.

That requires a swift move toward new business models. It’s interesting to see how Amazon is moving toward a subscription business model and what that implies.

In fact, most companies that start experimenting with subscription models – especially when coming from a product-based business model – experience periods of losses that are known as “swallowing the fish.”

Is Amazon going to swallow the fish successfully?

What to read next: How Amazon Makes Money

How To Scale Your Business With A Subscription Business Model

How Amazon Makes Money: Amazon Business Model in a Nutshell

https://fourweekmba.com/amazon-strategies-growth/

What Is the Cost per First Stream Metric? Amazon Prime Video Revenue Model Explained

Resources to get started with your business:

What Is a Business Model? 26 Successful Types of Business Models You Need to Know
What Is The Best Business Model For A Small Business?
What Is a Business Model Canvas? Business Model Canvas Explained
Business Model Tools for Small Businesses and Startups
What Is a Value Proposition? Value Proposition Canvas Explained
What Is a Lean Startup Canvas? Lean Startup Canvas Explained

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Published on February 22, 2020 12:14

Amazon Case Study – Tearing Down The Whole Business

Amazon runs a platform business model as a core model with several business units within. Some units, like Prime and the Advertising business, are highly tied to the e-commerce platform. For instance, Prime helps Amazon reward repeat customers, thus enhancing its platform business. Other units, like AWS, helped improve Amazon’s tech infrastructure.

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Today Amazon is a tech giant who dominated the e-commerce business by offering a wide variety of products, at low cost, and with a delivery service propelled by its inventory management infrastructures, built over the years.

But, if Amazon is an extremely complex company, which can’t be easily labeled, how can we call its business model?

A platform business model at the core

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Amazon business runs on top of a platform model (to understand what makes it a platform business read this), built over the years, which takes advantage of network effects and flywheel effects.

At its core, Amazon has to keep attracting over and over billions of consumers across the globe on its platform and keep offering a broad variety of products.

As a two-sided platform, Amazon has also to keep its platform interesting to sellers, who are willing to showcase and sell their products directly on Amazon.

Indeed, over the years the company has experimented with many strategies, and among them, Amazon Prime and the seller services helped Amazon successfully transition toward a platform business.

[image error]Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start by the entrepreneur’s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.

While this platform business is the foundation of Amazon, what other key businesses exist today on top of that?

Amazon multi-layered business model

Let’s dive into the details of the different models used by Amazon for each of its segments and how some have a logic that ties them together.

For the sake of this analysis, we’ll look at four primary segments:

Prime (media platform business)E-commerce: first-party, third-party, seller services (e-commerce/marketplace platform business)Advertising (media platform business)AWS (AI-ML platform business)

Those are all platforms business models, as they enjoy the network effects and scalability typical of a platform.

At the same time, they have different value propositions, customer segments, and resources to run successfully.

Prime media business in a nutshell

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For instance, Prime is a media platform business running a subscription-based revenue generation, with recurring revenues.

Amazon Prime is a media and entertainment platform, yet its strategic business value goes way beyond that.

This platform targets content creators who have to be incentivized to feature their content on Amazon Prime.

While consumers are incentivized to join Amazon Prime to get movies, ebooks and free shipping on products that are fulfilled by Amazon.

Many see this program as an additional revenue stream that the company enjoys to enhance its revenues.

However, Amazon Prime is a program who has come up after many years of trial and errors by Amazon’s management to come up with ways to:

reduce customers’ acquisition costs and facilitate repeat purchases: one of the major issues of building a digital platform (but also any other business) are customer acquisition costs and repeat purchases. A habitual Amazon customer buys many times a year. Therefore, shipping costs can easily eat up the convenience of buying on Amazon in the first place. How to prevent that? Cutting or removing those costs is the answer. While it’s hard to justify a membership program based solely on removing the cost of shipping. By offering a broad range of services (free ebooks, free movies and shows, and free shipping) all of a sudden you have an entertaining platform together with free shipping. Which makes the whole value proposition way more compelling. incentivize sellers to host their inventories with Amazon: so the company could guarantee fast delivery and lower prices, while also charging a service fee to those sellers. Also, by managing inventories of products from beginning to end. Those same sellers indeed can sell more as customers who have Amazon Prime might want to purchase as they won’t pay for shipping costs. make of Amazon a global consumer brand: digital platforms like Amazon have been extremely good at scaling up in a time when they had no resources compared to established brands. As Amazon scaled and consolidated its position in the market, it also started to invest more and more on its brand (in 2019 Amazon spent $11 billion in marketing). In short, it moved from a solely practical value proposition (price and convenience) to culture-making by investing more and more on marketing and content to consolidate its global brand.

In short, the revenue stream generated by the model is the side effect of a program developed over the years to solve important issues of a business model that needed to keep providing more value to consumers as it scaled.

Advertising business in a nutshell

[image error]The digital advertising industry has become a multi-billion industry dominated by a few key tech players. While the industry advertising dollars are also fragmented across several small players and publishers across the web. Most of it is consolidated within brands like Google, YouTube, Facebook, Instagram, Amazon, Bing, Twitter, and Pinterest.

The advertising business is also a media business, which runs an attention-based revenue generation, which is performance-based (actions on the platforms like clicks, and impressions which get paid by advertisers).

To gain a bit of context, Amazon is among the largest players in the digital advertising business. This makes the platform more interesting to sellers who want to feature their products on top of Amazon listing or to leverage on Amazon transactional data to sell more.

Thus, the key player is the consumer and the ability of the platform to keep attracting billion of consumers across the world. The key customer is the seller willing to pay Amazon to get better placement and more visibility of its products.

E-commerce platform business in a nutshell

The e-commerce platform has within a first-party and third-party seller business.

The first-party comprises products with Amazon brand. Third-party products are those featured on Amazon but sold from outside stores.

Amazon also gives the option to those third-party sellers to manage their inventory directly within Amazon, from an additional fee on the products who are fulfilled directly by the company.

The e-commerce platform remains the foundation of the overall Amazon business and what makes Amazon among the most interesting companies in the world.

Amazon knows it well, and indeed, the whole Amazon flywheel starts from there. This is how a strategy for a complex platform can be simplified. As a platform, you might want to focus on a core stakeholder and transaction to make it scale.

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It’s interesting to notice how the fact that Amazon was looking into a way to enable sellers to (thus transition toward a more scalable/platform model) started with a random tinkering and turned into AWS.

AWS AI platform business in a nutshell

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AWS is one of the Amazon massive experiment who turned into a successful business. Over the years, Amazon tested many ideas, also those ideas who were not just coming from customers’ requests, but by the vision of Amazon about what products could have passed the expectations of consumers.

AWS primarily sells computing, storage, database, and other services. Primarily a consumption-based service, Amazon AWS‘s main stakeholders are developers, dev managers, ops managers, CIOs, chief digital officers, and chief information security officers.

Amazon AWS is also an AI-ML platform business whose success is the ability to attract developers to build ML tools in the cloud, which can be used by organizations and enterprises buying cloud services to scale their businesses with lower technological costs.

One example is Amazon SageMaker, a cloud machine-learning platform that makes it possible for developers to build those models, thus making the Amazon cloud services more attractive in the first place to enterprises buying cloud services.

Key takeaways from Amazon Case Study

Over the years Amazon has been able to build a complex multi-layered business model, based on several key partners, value propositions, infrastructures and revenue streams.

This is model is the fruit of a long-term vision, but not the result fo a pre-packaged design. Successful companies require tinkering and a lot of trial and error.

Many of those business units, over the years, might have grown as a side effect of figuring out a way to make Amazon a more scalable platform as it helped expand its product variety, convenience, thus align to its long-term vision in unpredictable ways:

[image error]Amazon’s mission statement is to “serve consumers through online and physical stores and focus on selection, price, and convenience.” Amazon’s vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.”

Related business researches on Amazon

Amazon Business Model What Is the Receivables Turnover Ratio? How Amazon Receivables Management Helps Its Explosive Growth Amazon Case Study: Why from Product to Subscription You Need to “Swallow the Fish”What Is Cash Conversion Cycle? Amazon Cash Machine Business Model Explained Why Is AWS so Important for Amazon Future Business Growth?Amazon Flywheel: Amazon Virtuous Cycle In A Nutshell Amazon Value Proposition In A Nutshell Why Amazon Is Doubling Down On AWS The Economics Of The Amazon Seller Business In A Nutshell How Much Is Amazon Advertising Business Worth?What Is the Cost per First Stream Metric? Amazon Prime Video Revenue Model Explained Jeff Bezos Teaches You When Judgment Is Better Than Math And Data Alibaba vs. Amazon Compared in a Single Infographic Amazon Mission Statement and Vision Statement In A Nutshell

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Published on February 22, 2020 02:47

February 20, 2020

Breaking Down Customer Obsession In Business

Customer obsession goes beyond quantitative and qualitative data about customers, and it moves around customers’ feedback to gather valuable insights. Those insights start by the entrepreneur‘s wandering process, driven by hunch, gut, intuition, curiosity, and a builder mindset. The product discovery moves around a building, reworking, experimenting, and iterating loop.

We’re all customer-centered

We all talk about customers and believe, that as business people we are customer-centered.

Entrepreneurs praise themselves for talking, understanding and serving customers. Managers praise themselves for having all the data to understand customers.

Rather than customer obsession, this is an obsession with customers.

Indeed, customer obsession means much more than just listening, serving or analyzing data about customers.

Customers know better

Building a viable business model starts by identifying a problem, talking to people who experienced that problem and evaluate whether you can build something more valuable than existing alternatives.

That is the baseline. However, there is much more to it.

Do customers know it all?

If you’re building a business just by listening or following what customers say, or believe they want, you might be easily derailed. Providing 10-100x more value than the existing solution in the marketplace implies vision, instinct and a lot of trial and error.

This is on the basis of customer obsession, so let’s break it down.

The bottom line is the side effect of how well you understand your customers’ problems, better than they do

Customer obsession starts from the fact, that as a business, you can unlock valuable insights, by testing what customers want. As you push new products in the market, the failures you get from those launches also give you valuable feedback to bust assumptions and bridge the gap between what customers say they want and what they really want.

Customer obsession: starts by listening to what customers want and beyond

As Jeff Bezos highlighted in Amazon’s 2018 Shareholders’ Letter:

Much of what we build at AWS is based on listening to customers. It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

Therefore, customer obsession starts with a superpower: wandering.

Wandering driven by hunch, gut, intuition, curiosity

Amazon’s early-stage growth was primarily driven by what Jeff Bezos defined a “culture of builders” made of people who were curious and explorers, and with the courage to invent.

The loop of building valuable product goes through a loop of “invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again.“

As Jeff Bezos highlighted back in 2018, wandering is not efficient, quite the opposite. It’s also not random, as it is driven and guided by “hunch, gut, intuition, curiosity, and powered by a deep conviction that the prize for customers is big enough that it’s worth being a little messy and tangential to find our way there.“

In short, wandering works as a counter-balance and unlock non-linear, breakthrough discoveries.

Jeff Bezos mention as an example AWS, for which “No one asked for AWS. No one. Turns out the world was in fact ready and hungry for an offering like AWS but didn’t know it. We had a hunch, followed our curiosity, took the necessary financial risks, and began building – reworking, experimenting, and iterating countless times as we proceeded.“

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Published on February 20, 2020 15:37

Third-Party Sellers And Amazon’s Platform-First Business

A platform business model is one of the most interesting models arose throughout the web era. Some of the components that make platform business models interesting are their scalability and the fact those platforms can leverage network effects and flywheel models to gain traction.

[image error]A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

When can we call a business model a platform?

[image error]A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

To answer this question we can look at the Amazon case study and how it transitioned over the years from e-commerce to a platform-first business model.

And how that platform business spurred the growth of other business units (AWS, advertising, third-party services, Prime) who might have not been possible without a solid platform business in the first place, and it all starts with building up critical mass to enable network effects.

Amazon platform-first business today

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In 2018, independent third-party sellers (mostly small– and medium-sized businesses) sold 58% of the merchandise on the Amazon platform.

Opposed to Amazon retail’s own first-party sales with the remaining 42%. As Amazon has put it “Third-party sellers are kicking our first-party butt. Badly.“

What are some elements to take into account to understand how Amazon transitioned toward a platform-first business model?

Amazon selling tools and the power of free tools

Amazon favored the transition toward a platform business model by building the selling tools (inventory management, processing payments, tracking shipments, reports) which made Amazon‘s website, not just e-commerce where they could distribute their product, but a management system they could rely on.

Fulfillment, Prime and the flywheel effect

When launching a platform business model that relies on third-party sellers, there are two major issues (among others).

First, you can’t guarantee the quality of the service (in this case delivery) if you don’t control the process.

Second, in the long-run, it becomes hard to have loyal customers, as transaction costs might make the repeat purchase not convenient to those shoppers, thus making a digital platform lose its initial competitive advantage over physical pairs.

How did Amazon, over the years, face those issues?

After many trials and errors, two programs in combination helped Amazon transition toward a successful platform model.

Fulfillment by Amazon and Prime in combination substantially improved the customer experience of buying from independent sellers, thus spinning the Amazon flywheel.

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As Amazon highlighted in its 2018 shareholders’ letter, at the time it was not an easy decision to make, as both programs implied huge investment and financial risks and those went through many internal debates and discussions, so at the time their success was not given for granted.

As explained in Amazon leadership principles, and how Jeff Bezos made decisions at the time, the Amazon leadership team used “intuition and heart, nourished with optimism” to make such a decision, which in hindsight seems almost trivial.

Will Amazon keep its platform business model as it is?

A platform business model was extremely effective to help Amazon scaling up in an era where the web was still an early-stage ecosystem.

Thus, a platform business back then (the late 1990s) up to the 2010s has proved an incredible model for traction, scale, and domination.

Whether Amazon will keep its platform as primarily serving third-party sellers we can’t know for sure.

For instance, Amazon might be able to revert this process by internalizing more brands.

In fact, as third-party sellers provided over the years incredible data about what people want, Amazon, in theory, has the power to have those items manufactured and sold with Amazon’s brand, thus increasing again the portion of first-party products.

Will this happen in the coming years? We’ll see.

Is a platform business model still the most viable solution today?

We’re living in an era where arising competition on the web, its growing maturity, and penetration to the whole world, have also changed the whole digital business landscape.

Building a platform business today might not be an easy option as the consolidated platforms (Google, Amazon, Apple, Facebook, and a few other brands) are acting as winners who took it all, thus locking-in distribution pipelines with their algorithms, and working as gatekeepers.

In this scenario, building up a successful platform business might have become a risky option, initially.

Thus, a cheaper option is to bootstrap the business to product-market fit first, then evaluate whether a platform business helps better serve existing customers, and at the same time expand the customer base.

In the end, Amazon itself took years to transition to a full-fledged platform business.

References: Amazon Financial Statements and Amazon Shareholders’ Letters

Read next:

Related resources:

What Is a Business Model? 30 Successful Types of Business Models You Need to Know Blitzscaling Business Model Innovation Canvas In A Nutshell What Is a Value Proposition? Value Proposition Canvas Explained What Is a Lean Startup Canvas? Lean Startup Canvas Explained The Rise of the Subscription Economy The Era Of Paywalls: How To Build A Subscription Business For Your Media Outlet What Is Business Model Innovation And Why It Matters What Is Blitzscaling And Why It Matters

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Published on February 20, 2020 13:37

February 16, 2020

A Quick Glance At The Digital Advertising Industry

The digital advertising industry has become a multi-billion industry dominated by a few key tech players. While the industry advertising dollars are also fragmented across several small players and publishers across the web. Most of it is consolidated within brands like Google, YouTube, Facebook, Instagram, Amazon, Bing, Twitter, and Pinterest.

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Google and YouTube advertising business models

[image error]Google LLC was created in 1998. However, the underlying algorithm (PageRank), which would enable Google to build a successful product and gain traction in the market, was built by Larry Page and Sergey Brin at Stanford University in 1996 as part of a research project to develop a search engine.

[image error]Google has a diversified business model, primarily making money via its advertising networks that, in 2019, generated over 83% of its revenues, which also comprise YouTube Ads. Other revenue streams include Google Cloud, Hardware, Google Playstore, and YouTube Premium content. In 2019 Google made over $161 billion in total revenues.

Google’s advertising revenue growth in 2019 was driven by a change in paid clicks and cost-per-click on Google properties and the change in impressions and cost-per-impression on Google Network Members’.

What are some of the factors affecting Google’s advertising revenues?
• advertiser competition for keywords;
• changes in advertising quality, formats, delivery or policy;
• changes in device mix;
• changes in foreign currency exchange rates;
• fees advertisers are willing to pay based on how they manage their advertising costs;
• traffic growth in emerging markets compared to more mature markets and across various advertising verticals

Google advertising revenues consist of:
• Google Search & other consists of revenues generated on Google search and other Google-owned and operated properties like Gmail, Google Maps, and Google Play;
• YouTube ads consists of revenues generated primarily on YouTube properties;
• Google Network Members’ properties consist of revenues generated primarily on Google Network Members’ properties participating in AdMob, AdSense, and Google Ad Manager.

The growth was primarily driven by interrelated factors including increases in search queries resulting from ongoing growth in user adoption and usage, primarily on mobile devices, continued growth in advertiser activity, and improvements in ad formats and delivery.

Facebook advertising business model

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Advertising is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by users.

In 2019 increased by $14.86 billion, or 27%, compared to 2018. The increase was almost entirely due to an increase in advertising revenue as a result of an increase in the number of ads delivered, partially offset by a slight decrease in the average price per ad.In 2019, the number of ads delivered increased by 33%, as compared with approximately 22% in 2018. The increase in the ads delivered was driven by an increase in the number and frequency of ads displayed across our products, and an increase in users and their engagement. In 2019, the average price per ad decreased by 5%.The decrease in average price per ad was primarily driven by an increasing proportion of the number of ads delivered as Stories ads and in geographies that monetize at lower rates.

Twitter advertising business model

[image error]Twitter is a platform business model, monetizing the attention of its users in two ways: advertising and data licensing. In 2018, advertising represented 86% of its revenue at over $2.6 billion. And data licensing represented over $424 million primarily related to enterprise clients using data for their analyses.

Twitter ad platform enables customers to advertise across the mobile ecosystem, both on Twitter’s owned and operated properties as well as off Twitter on third-party publishers’ websites:

MoPub, a mobile-focused advertising exchange, which combines ad serving, ad network mediation and a real-time bidding exchange.Twitter Audience Platform, an advertising offering that enables advertisers to extend their advertising campaigns with Twitter Promoted Products to audiences.

Total revenue for 2019 was approximately $3.46 billion, an increase of 14%, or 15% on a constant currency basis. Advertising revenue grew 14%, or 15% on a constant currency basis, primarily driven by 21% growth in the US.

Microsoft’s advertising business model

The search business includes Bing and Microsoft Advertising. Microsoft also has several partnerships with other companies, including Verizon Media Group, through which Microsoft provides and monetizes search queries.

Amazon advertising business model

Amazon advertising is directed to sellers, vendors, publishers, and authors, through programs such as sponsored ads, display, and video advertising. Other revenue primarily includes sales of advertising services.

Pinterest advertising business model

[image error]Pinterest makes money by selling advertising for marketers and companies that can gain visibility for their brands and more sales for their shops. In 2018, Pinterest made over $755 million in advertising revenue and it had 250 million monthly active users.

Pinterest offers both brand and performance ads, with performance representing approximately two thirds of Pinterest’s revenue as of 2019.

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Published on February 16, 2020 14:32

When Was Google Founded? A Quick History Of Google

Google LLC was created in 1998. However, the underlying algorithm (PageRank), which would enable Google to build a successful product and gain traction in the market, was built by Larry Page and Sergey Brin at Stanford University in 1996 as part of a research project to develop a search engine.

A quick history of Google

Before we get to the history of Google, based on the FourWeekMBA‘s perspective, I want to highlight that this is one of the possible ways this story can be interpreted.

And that history makes sense only in hindsight and that overall the whole success of Google as a company has been driven by factors which are hardly detectable if not after the unraveling of the story.

Thus, rather than taking this as a lesson in business success, I’d rather take it as a perspective on the overall evolution of the web and how business trends form.

Google surfed extremely well the transition between an early-born web (not Internet which was born way before that) and what would become an infant web (how we know it today).

As a tech giant Google also shaped and shapes the web of today, thus enabling the creation of new business trends, that companies in the market can surf to gain traction.

This era which might last a few decades will go toward a mature web, and how it will turn out to be will depend on many, not foreseeable factors.

So let’s start with a statement from Google‘s founders, back in 2017:

We’re in an era of great inspiration and possibility, but with this opportunity comes the need for tremendous thoughtfulness and responsibility as technology is deeply and irrevocably interwoven into our societies.

This is what Sergey Brin said in the 2017 Alphabet founders’ letter.

The beginnings with PageRank

PageRank helped solve a critical problem in the early-web, that of helping people surface the web by finding relevant information with the exponential growth of web pages.

Indeed, PageRank was a scalable search engine, a major attempt to bring more order and value to users who finally could get out of walled gardens like AOL and find anything they needed.

And as a product, it was probably 10x compared to existing players. This seems an acceptable explanation as Google entered the market late. And when you do enter late, usually you can gain traction by offering a product which is superior.

The early skepticism of advertising as a viable business model for search

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In the paper “The Anatomy of a Large-Scale Hypertextual Web Search Engine” where Page and Brin presented their first prototype of Google (initially known as BackRub). With full text and hyperlink database of at least 24 million pages, in a paragraph dedicated to advertising, they explained: “We expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.“

Indeed, when they met Bill Gross, founder of GoTo, which would later become Overture, probably the first search engine to introduce an auction-based system for bidding businesses, the two young fellows didn’t seem excited about the prospect of following that model.

Until they figured a business model which would prove effective as they would later mention in a shareholders’ letter:

Advertising is our principal source of revenue, and the ads we provide are relevant and useful rather than intrusive and annoying.

Great Product + Scalable Business Model = First Traction Stage

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By 2000 Google was already a key player in the search industry. However, it hadn’t yet figured a scalable business model. At the time Google was still relying on closing advertising deals by using its sales force.

In short, it hadn’t yet a scalable advertising platform, and it hadn’t yet a scalable platform that would enable organic-generated content. In a few years, AdWords (now Google Ads) and AdSense would enter the picture:

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Thus, Google finally had a scalable advertising platform, Google AdWords, based on “objective metrics” (this would be the key ingredient for its success) by disintermediating the advertising agency, at least in the digital world.

And it managed to build a scalable platform, Google AdSense, that incentivized publishers, or anyone owning a website to easily monetize their traffic. This enabled a few interesting web trends which Google shaped, thus proving its potential as a business:

Bloggers became legitimate players during that timeEstablished media brands were threatened by new players able to leverage on the new digital logics The new publishing business model would primarily rely on advertising revenues, and less and less on subscription revenues (a trend that is now reverting)

As Google scaled business processes and organizational structure became more relevant.

If you want to have a more in-depth overview of Google history read this.

Google business model today

[image error]Google has a diversified business model, primarily making money via its advertising networks that, in 2019, generated over 83% of its revenues, which also comprise YouTube Ads. Other revenue streams include Google Cloud, Hardware, Google Playstore, and YouTube Premium content. In 2019 Google made over $161 billion in total revenues.

[image error]YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, and it generated more than $15B in revenues in 2019. YouTube also makes money with its paid memberships and premium content.

[image error]As part of Google (Alphabet), YouTube contributes to Google advertising revenues. Advertising is the primary driver of Alphabet’s Google’s revenue, and it added over $15B.

[image error]In 2019, Alphabet’s (Google) Cloud Business was an almost $9 billion unit within Alphabet’s Google overall business model; to gain a bit of context; Microsoft intelligent cloud netted nearly $39 billion and Amazon AWS $35 billion in the same year.

[image error]In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through consumers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

When we think in bits rather than atoms, Google is a vertically integrated company. And this vertical integration starts from the physical world made of hardware (Google data centers, Google mobile devices, Google Home voice assistants, and more) and it continues in the bits world made of software, algorithms and tech products (Chrome Browser, Google search engine, YouTube, and more).

What’s next? Future trends shaped by Google

Google, now Alphabet, surfed the incredible growth of the web, extremely well, and it then became itself one of the key nodes of the web we know today.

As a key node, the company today shapes the trends that formed on the web, thus opening up new threats but also new, important opportunities for those who are able to see them.

Some of the trends worth mentioning are:

Established brands might be less risky to Google

As Google scaled, it changed drastically as an organization. To prevent phenomena that can negatively impact the Google Business Model and attract unwanted attention by regulators, Google might like and favor stronger brands.

As the reasoning goes that a stronger brand might give more guarantee of quality and fact-checking ability as it can invest more in that.

So as Google scales its ability to fact-check information, publishers who have more resources to do it internally might also be more trustworthy.

New publishing business models are needed

Digital advertising business model no longer sustainable for most online advertisers now reverting back to a subscription, see the NYT business model.

While the subscription business model does work financially, it also might reduce the visibility of the brand, thus opening up opportunities to those able to build an asymmetric business model.

Organic visibility becomes less rewarding and more challenging

At the same time attracting organic traffic has become more complicated and less rewarding, as Google creates new features that cut the visibility of organic listing. Therefore, publishers need to understand those new logics.

Blogging starts from microniches

Blogging has become a highly competitive industry, and starting up from a wide niche or industry can’t be extremely hard, thus it might make sense to identify microniches.

Building a business inside a walled garden

Google‘s core business (search and discovery) is becoming a walled garden. That requires small businesses to initially give up something that Google wants in exchange for traction.

Then a small business should build a more independent distribution strategy, and brand to prevent too much dependance of Google as core distribution.

Google products scaling globally

Google’s core products are already used by billions of people. Google search engine and YouTube are the most popular sites on earth (at least in the Western World).

As Google transitioned toward becoming a mobile-first and AI-first organization, this makes its products even stickier and engaging for billions of people, thus attracting more eyeballs, for longer time within Google products.

This means that those able to see this opportunity can build valuable small and medium businesses on top of Google. How? Read next.

Google as a super-platform

Just like in the past companies like Booking, TripAdvisor and other platform business models became successful and billion-dollar businesses, thanks to Google sending them an endless stream of qualified traffic.

Now Google operates itself as a super-platform that offers within its walled gardens dozens of platforms (Jobs, E-commerce, Travel, Publishing and more). That threatens the existence of the platforms initially built on top of Google which now have to redefine their value propositions (unless of course, regulators or an antitrust case might define that as abuse of dominant position and stop Google from expanding in those niches).

Thus, while Google sent traffic out to those platforms in the past, it might now retain it within its walls.

How do you build a business on a super-platform?

If you’re a publisher you might want to look at original content, reporting, in-depth analyses and to invest more and more in becoming the source of the information, rather than a distributor or provider of third-parties content.

If you operate as e-commerce being the retailer, or the manufacturer of that product rather than a distributor might be an advantage as you can leverage on platforms like Google Merchant Center to enhance your distribution.

And more generally building a strong brand, recognized in a smaller space, rather than a traffic center, or aggregator, might be a good entry strategy.

Free AI Tools to build your next startup

Google has transitioned into an AI-first organization and at this stage, the AI side of the Google business model is open and collaborative.

That means you can leverage those AI tools to build your next startup and make it scale. Beware though, as an AI ecosystem will form and Google might be able to monetize it, the company might close that.

For now, the more immediate monetization for Google is through its Google Cloud Business.

In short, those AI tools follow a freemium-like growth strategy where more people joining might get acquainted also with Google Cloud offering, and for now, Google has to keep pushing more and more if it wants to keep up with Microsoft and Amazon.

This gives you plenty of time to build a valuable company. However, as your startup grows you might want to develop your own AI tools and models, to prevent Google one day to take your business away.

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Published on February 16, 2020 09:59

Google Cloud Business Model In A Nutshell

In 2019, Alphabet’s (Google) Cloud Business was an almost $9 billion unit within Alphabet’s Google overall business model; to gain a bit of context; Microsoft intelligent cloud netted nearly $39 billion and Amazon AWS $35 billion in the same year.

How does Google cloud business model work?

Google Cloud revenues consist primarily of revenues from Google Cloud Platform comprising G Suite productivity tools and other enterprise cloud services provided on either a consumption or subscription basis.

The cloud business unit is extremely important for Google as the whole company was built in the cloud. Now the Cloud includes Google Cloud Platform and G Suite enabling developers to build, test, and deploy applications on Google’s infrastructure.

The G Suite productivity tools comprise apps like Gmail, Docs, Drive, Calendar, and more.

Alphabet is also devoting significant resources to develop and deploy the enterprise-ready cloud services, including Google Cloud Platform and G Suite.

What does Microsoft Intelligent Cloud business model work?

[image error]Microsoft has a diversified business model spanning across Office products, Windows, Gaming (Xbox), Search Advertising (Bing), Hardware, LinkedIn, Cloud and more.

Microsoft’s Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business.

The segment primarily comprises:

Server products and cloud services, including SQL Server, Windows Server, Visual Studio, System Center, and related CALs, GitHub, and Azure.Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

Server Products and Cloud Services

The key value proposition for Microsoft’s server products and cloud services is to make IT professionals, developers, and their systems more productive and efficient.

As Microsoft highlights:

Server software is an integrated server infrastructure and middleware designed to support software applications built on the Windows Server operating system.

This includes the server platform, database, business intelligence, storage, management and operations, virtualization, service-oriented architecture platform, security, and identity software.

Microsoft also acquired GitHub which provides a collaboration platform and code hosting service for developers.

Azure is a comprehensive set of cloud services that offer developers, IT professionals, and enterprises the freedom to build, deploy, and manage applications on any platform or device.

Enterprise Services

Enterprise Services, including Premier Support Services and Microsoft Consulting Services, assist customers in developing, deploying, and managing Microsoft server and desktop solutions and provide training and certification to developers and IT professionals on various Microsoft products.

What does Amazon AWS comprise?

[image error]Amazon AWS follows a platform business model, that gains traction by tapping into network effects. Born as an infrastructure built on top of Amazon’s infrastructure, AWS has become a company offering cloud services to thousands of clients from the enterprise level, to startups. And its marketplace enables companies to connect to other service providers to build integrated solutions for their organizations.

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AWS arrangements include global sales of computing, storage, database, and other services. The Amazon AWS business model proved incredibly scalable and it’s among the most profitable units for the organization.

Amazon AWS’s story is quite interesting as it shows how by tinkering organizations scaling up might come up with whole new business units that while seemingly disconnected from the main business, in reality, those are the foundation and then become key business units that run their own business model.

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Published on February 16, 2020 08:12

February 11, 2020

Google SWOT Analysis In A Nutshell

Google‘s strength is its strong consumer brand. The company is grabbing new opportunities by opening up industries like voice search and consolidating in industries like the cloud. As a weakness, its revenues primarily come from advertising. A primary threat is the quick change of search and potential intervention by regulators.

Strengths

[image error]Google’s mission statement is to “organize the world’s information and make it universally accessible and useful.” While its vision statement since the start was to “provide an important service to the world-instantly delivering relevant information on virtually any topic.”

Brand: Google enjoys a brand that is extremely strong. The company’s products are used each day by billions of people across the world, with incredible engagements rate.Strong consumer products: Google’s core product, its search engine I a goldmine of search intent data which makes it possible for Google to still have a long-term advantage against competitors in the space.Massive users’ adoptions: the company’s products are incredibly sticky for users, which are the key stakeholders for Google’s continuous growth and development as an organization.

Opportunities

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Google has substantial cash to invest back in R&D activities on its core products but also to invest to open up new market opportunities. This makes Google a unique company. While bets are companies that do not have a current impact on Google business (that is why we’ll see them also in the weakness section), other revenue sources, like cloud, and hardware are also a strong contributor to Google‘s revenues.

Weaknesses

[image error]The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic on its pages for monetization. Over the years Google has been able to reduce its traffic acquisition costs and in any case to keep it stable. In 2017 Google spent 22.7% of its total advertising revenues (over $21 billion) to guarantee its traffic on several desktop and mobile devices across the web.

For a company like Google, sustained success means that the company will be able to keep its products sticky for billions of users across the globe. That is why the core focus is on users‘ adoption of continuous growth. Indeed, the more users join the platform the more that becomes interesting for advertisers who contributed to 83% of Google‘s revenues in 2019.

[image error]Google has a diversified business model, primarily making money via its advertising networks that, in 2019, generated over 83% of its revenues, which also comprise YouTube Ads. Other revenue streams include Google Cloud, Hardware, Google Playstore, and YouTube Premium content. In 2019 Google made over $161 billion in total revenues.

So what are some of Google‘s weaknesses?

A significant portion of Google revenues are generated from advertising, therefore a reduced spending by advertisers, a loss of partners, or new and existing technologies blocking ads could seriously harm the business.While other bets are long-term strategic initiatives for Google, those bets are highly uncertain and the company will not be able to assess whether any of those will become successful, if not in hindsight. As Google has become a global player primarily based on the digital advertising industry, as the industry matures and consolidates this also might mean stagnating revenues for Google and a strong reduction of its margins.If the company fails to protect its intellectual property rights that might also result in a substantial risk for the business.Brands are among the most important assets for organizations, but they are also expensive to maintain, thus, Google’s strength as a mass appealing consumer brand can also turn in weakness as the company has to keep pouring billions back to the business to maintain its assets in the short term.

Threats

[image error]FAANG is an acronym that comprises the hottest tech companies’ stocks in 2019. Those are Facebook, Amazon, Apple, Netflix and Alphabet’s Google. The term was coined by Jim Cramer, former hedge fund manager and host of CNBC’s Mad Money and founder of the publication TheStreet.

The current market propelled by technological companies has become highly fluid, as those companies all fight for the same pocket. This makes it harder to keep track of all the possible threats and which one might really harm the business. For the sake of this analysis some of the key threats for Google are:

Intense competition: innovation isn’t easy, neither inexpensive. If Google doesn’t successfully manage to keep its innovation pace it might eventually lose its dominating position, thus jeopardize the business. As people access to the internet now happens through a variety of platforms, that increases substantially the pressure for companies like Google, which business model is based on the attention and interest of its users. That means the company has to be able to keep anticipating those trends.Data privacy, security concerns, and regulations become a serious threat to Google’s future success.Low-quality user-generated content, web spam, content farms, can seriously worsen the quality of the content provided on Google thus making suddenly less appealing to users.

Key takeaway

The SWOT analysis is an interesting exercise to get to know an organization more intimately. However, when it comes to the business landscape it’s extremely hard to predict where the next threat will come from, or whether the opportunity you’re pursuing will turn out to be successful. That is why it’s important to have a strong experimental framework.

Other case studies:

How Does Google Make Money?The Power of Google Business Model in a Nutshell How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained How Amazon Makes Money: Amazon Business Model in a Nutshell How Does Netflix Make Money? Netflix Business Model Explained How Does Spotify Make Money? Spotify Business Model In A Nutshell DuckDuckGo: The [Former] Solopreneur That Is Beating Google at Its Game How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained

Other business resources:

What Is a Business Model?What Is a Value Proposition?What Is a Lean Startup Canvas?What Is Business Model Innovation?What Is Business Analysis?

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Published on February 11, 2020 07:31