Most of Amazon’s revenue comes from online sales of its products, and most of its profits come from its cloud computing arm. In both cases, the businesses were almost entirely built in-house.
Despite this, Amazon has made large acquisitions in adjacent markets that show it is willing to spend on growth.
Amazon announced Thursday that it will buy One Medical for $3.9 billion, marking a major expansion into health care for the company. As part of Amazon Health Care, primary care provider will join other services like the online pharmacy, telehealth services, and nascent diagnostics.
Two of Amazon’s largest acquisitions so far were its $13.7 billion purchase of grocery chain Whole Foods in 2017 and its $8.45 billion purchase of film and television distributor MGM Studios last year.
Wharton School of the University of Pennsylvania business professor Emilie Feldman claims that, these deals highlight how Amazon and other Silicon Valley mega corporations like Google, Facebook, and Apple have turned into “modern day conglomerates” in pursuit of sustained development from their already massive bases.
“What they’re doing is a strategy in search of growth in adjacencies to this core area that might be a bit constrained in and of itself,” said Feldman. “So e-commerce is e-commerce, but can we kind of search for niches that might be faster growing like health care, or can we accelerate our ability to get before people’s eyeballs through ads or something like that through MGM.”
“They need to get into new areas where they can find growth, and health care is ripe,” Insider Intelligence’s Lisa Phillips, a primary digital health expert, agreed. “With this acquisition here, they’re saying we’re in this to win it now.”
In addition, Amazon is forbidden to make acquisitions in its core markets, lest it anger regulators who are already looking at its market power with suspicion. In order to overcome these obstacles, the company has to invest heavily in less dominant areas, such as healthcare or autonomous driving.
Additionally, the MGM and Whole Foods deals tie into Amazon’s Prime subscription service, which provides a steady stream of recurring revenue.
It is possible for One Medical to follow the same template as the pharmacy benefit is already included in Amazon Prime.
“They can offer discounted health care to Prime members, which creates more loyalty around Prime,” Edward Jones senior analyst, Brian Yarbrough said. “It’s another feather in their cap.”
Whether the acquisition will lead to expanded Prime benefits or not, this was not specified by Amazon on Thursday. According to Neil Lindsay, senior vice president of Amazon Health Services and former head of Amazon Prime, “health care is high on the list of experiences that need reinvention.”
You got to build it or buy it
In each of the three cases, Amazon went out of its way to develop those business areas on its own before making the acquisition.
With services like Amazon Fresh and Prime Now, Amazon began to make inroads in grocery delivery in the mid-2000s. The company was not making much progress roughly a decade later, and it acquired Whole Foods to gain industry expertise and a large physical storefront network.
There is no denying that Amazon Prime Video is a serious competitor to streaming services such as Netflix, Disney, and Hulu, and the company puts billions of dollars in creating original content for its Prime members each year. Amazon gained immediate access to storied titles including the James Bond catalog and premium cable network Epix through its purchase of MGM.
In the same way, Amazon has experimented with the healthcare industry for a while. In 2018, Amazon bought PillPack for $750 million, and the company then launched its own pharmacy. Additionally, Amazon Care, a service that includes both telehealth and in-person care, was launched last year, initially for Amazon employees. There is a competition between One Medical and this offering.
The company has certainly been successful in diversifying with its own businesses. AWS began in 2006 and has become the industry’s leading cloud computing platform, generating $18.5 billion of Amazon’s $24.9 billion in operating income last year. It has also become a formidable competitor in online advertising with Amazon, bringing in $31.2 billion in revenue in 2021, surpassing Snap, Microsoft, and Pinterest.
The company has also shown it will buy if it is not able to build quickly enough.
Leave a Reply