Jeff's Russian Dolls

My daughter wanted a set of Russian dolls to play with.  To watch her pack and unpack dolls these dolls made me think about how rare certain entrepreneurs are.  Here is why: 90% of new businesses fail within a few years.  Therefore, the entrepreneur that can grow and sustain a new business possesses a combination of resilience and critical thinking that is uncommon.  To take it a step further, entrepreneurs that build second, and third unrelated business lines are rare breeds.  
 
Then, there is Jeff Bezos.  He sits on Mt. Rushmore for entrepreneurs.  Not only he has built two of the biggest, yet unrelated businesses – but the sheer scale and leadership position that these businesses command are what makes these accomplishments absolutely jaw-dropping.  The first one is the well know ‘everything retail store’.  The second is one of the largest technology businesses in the world.  Then there are advertising, logistics, hardware, and other future bets.  No wonder Amazon is one of the highest valued businesses in the world.    
 
While ‘your margin is my opportunity’ is a well-known Bezos operating principle - others are less well known.  (For a list of Bezos operating principles, here is a link to a blog post by Mr. Griffin (LINK)   One of Amazon’s lesser-known core operating philosophy is to look at every major cost as an opportunity for a future source of revenue.  And … have they done a miraculous job of executing on this initiative! 
 
The genesis of Amazon Web Services (AWS) - often referred to as the Cloud business - was one of necessity.   Twenty years ago, Amazon - like the rest of retail - was a seasonal business.  50% of Amazon’s sales happened in the fourth quarter.  The company needed massive excess server capacity to ensure customers could access their websites during the holiday season.  However, most of this capacity was idle during the rest of the year.  Jeff Bezos had an idea to rent out this excess capacity in the other three quarters to outside companies.  Amazon Web Services was born.  Here is a link to a great Twitter thread by an Amazon insider for background (LINK)
 
In 2010, Amazon spent $1.7 billion on technology & content spending.  In 2021, AWS is estimated to generate ~$60 billion in revenues with greater than 30% operating margins.  This business is worth between $700 – 900 billion.  Not only is AWS one of the most valuable technology businesses in the world – worth more than Adobe or Salesforce – but it is also the base layer or framework that other technology businesses are building on top of.  Enabled by AWS, the cloud is eating software.  Today, startups just get an account on AWS, instead of buying hardware.  Entrepreneurs can focus on their core idea.  AWS takes care of the rest.  AWS has the distinction of single-handedly accelerating the pace of innovation and disruption for the world. 

Amazon Marketing services (AMS) is another example.  Amazon has tremendous mindshare as close to 50% of American households today are Prime members.  Therefore, Amazon is an obvious starting ‘search’ point for most consumer goods.  It is much easier to show relevant Ads when consumers are telling you what they want.  It is also easier to measure the efficacy of that advertising in a closed-loop system, such as the Amazon platform.  On the other end, there are two million third-party sellers who need to showcase their products to high intent consumers.  AMS is just leveraging this existing ecosystem, which makes its accomplishment less impressive, especially when compared to AWS.  However, it is just as profitable.  2021 will be the first year when revenues from AMS will be greater than the total advertising expense of the entire Amazon business!  Therefore, it is only a matter of time - that advertising - like AWS, will be a net income, rather than an expense.  Global advertising is $650 billion dollars.  Google and Facebook dominate online advertising.  Today, AMS is small in the context of Amazon’s mindshare of consumers.  However, as Apple introduces stricter rules around customer data tracking and Google eliminates the use of cookies, the data that Amazon has, becomes even more valuable for advertisers.  It should not surprise anyone, if AMS, like AWS turns into an advertising juggernaut. 
 
The next, and currently, the most interesting one is Amazon Logistic services or AMZL.  It is no secret that instant shipping is coming to most neighborhoods in America.  To ensure a great order-to-delivery experience, Amazon is investing heavily in logistics, fulfillment centers, air capacity, and last-mile delivery.  The sheer scale of Amazon’s current logistics investments is jaw-dropping.  It far exceeds what Fedex, UPS, and DHL are incurring … cumulatively.  It goes without question that Amazon wants to support the majority of its own business.  However, some of these investments are also defensive in nature.  Walmart and Target, through acquisitions, have figured out how to use their stores as shipping hubs.  They have also grown their digital business faster than Amazon has, albeit from a much smaller base.  The big question is will Amazon build a logistics network much greater than its own need and then rent out the excess capacity to other businesses?  If the past is prologue, the answer is likely yes. 
 
Lastly, it is worth asking a few questions to directionally think about future businesses to emerge out of Amazon.  Alexa! what are the largest costs for Amazon today?  As we automate fulfillment centers, will robots replace the majority of human workers?  If so, will Amazon build the best robots that can lead to full-scale picking and packing automation?  Last-mile delivery is a significant cost item for Amazon.  Will the Rivian acquisition provide the platform for autonomous delivery?  Will Amazon build an automated fulfillment center floor for its own use and then produce that for competitors?  What about Amazon Go and seamless checkout?  Then there is healthcare.  The list of potential Jeff’s dolls is long.
 
In the year 2000, Amazon recorded sales of $2.7 billion.  Last year, 2020, sales were $386 billion.  That is an astounding revenue CAGR of 28%.  Over the past three years, Amazon has averaged a 25% return on equity.  The new businesses have a higher margin and require a lot less capital.  Not only has Jeff produced dolls no one thought were possible, but the dolls are getting bigger and better. 
 
This month, Jeff Bezos stepped down as the CEO of Amazon, exactly 27 years after starting the company.  He insists it's still Day 1 at Amazon.

​--

This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund").  Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law.  An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal.  There is no secondary market for interests in the Fund and none is expected to develop.  No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment.

This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund.  These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described.  These forward-looking statements will not be updated in future.