Amazon's (AMZN +0.26%) founder and CEO Jeff Bezos recently announced he would step down as CEO in the third quarter of 2021 and hand the reins over to his cloud chief Andy Jassy. Bezos will remain onboard as Amazon's executive chairman.
The announcement initially surprised many investors, but Amazon's stock stabilized after investors digested the news. Let's take a look at the five main challenges Jassy will face over the next few years.
1. The continued growth of AWS
Jassy, who joined Amazon in 1997, has led Amazon Web Services (AWS) since its inception in 2003. Under his leadership, AWS became the world's largest cloud infrastructure platform and Amazon's most profitable business.
Image source: Amazon.
AWS controlled 32% of the global cloud infrastructure market in the fourth quarter of 2020, according to Canalys, while Microsoft's (MSFT +0.60%) Azure ranked second with a 20% share. It also generated 59% of Amazon's operating profits in fiscal 2020, and its higher-margin revenue continues to support the ongoing expansion of the company's lower-margin marketplaces.
AWS' revenue rose 30% in 2020, but that marked a slowdown from its 37% growth in 2019 and 47% growth in 2018. Azure's revenue rose 56% in fiscal 2020, which ended last June, as it gained more customers (especially retailers) that didn't want to feed Amazon's profit engine.
Jassy must ensure AWS keeps growing, adding new services, and widening its moat, but those tasks could be challenging as Jassy steps away from AWS and hands the reins over to a new leader.
2. Fixing its video game business
Jassy recently reaffirmed his commitment to expanding Amazon's fragmented video game business, which includes its streaming platform Twitch, the first-party publisher Amazon Game Studios, and the Luna cloud gaming platform.
Twitch still retains a wide lead against Alphabet's (GOOG +1.99%) (GOOGL +1.71%) YouTube and Facebook (FB +1.81%) in the game streaming market, but its other efforts are messy.
Amazon Game Studios already cancelled several high-budget games, and its online RPG New World still hasn't been released more than four years after its initial announcement. Luna also faces intense competition from Google Stadia, Microsoft's (MSFT +0.60%) Xbox Cloud Gaming, and other cloud gaming platforms.
If Jassy wants to fix, unify, and expand Amazon's video game business, he will need the business to make bigger investments or acquisitions. If not, this fragmented business could gradually fall apart.
3. Resolving its quality control issues
Amazon has gradually increased its dependence on third-party sellers to boost its marketplace revenue over the past decade. Its third-party service revenue rose 50% to $80.5 billion, or 21% of its top line, in fiscal 2020, up from 19% in 2019 and 18% in 2018.
Image source: Amazon.
That growth is a double-edged sword: It boosts Amazon's revenue, but it opens the floodgates for low-quality and counterfeit products. This business model leaves Amazon exposed to customer lawsuits and tighter regulations, which could hold it legally accountable for faulty products from its unscrupulous third-party sellers.
This influx of low-margin third-party sellers, especially from China and other overseas markets, could also prompt more merchants to abandon Amazon and open their own online stores on Shopify (SHOP +3.18%) instead. Jassy needs to plug up these leaks before more shoppers and merchants abandon ship.
4. Improving Amazon's labor conditions
Amazon faces a growing number of complaints and protests regarding low wages and poor working conditions in its warehouses. Jassy needs to decide if Amazon will improve those conditions and raise the average salary of its warehouse workers (which currently stands at about $31,000 a year) or automate those jobs away with more warehouse robots, driverless cars, and delivery drones.
Either approach would throttle Amazon's near-term margins. However, raising wages and addressing employee complaints could improve Amazon's image, as we saw Doug McMillion do for Walmart, while automating jobs away could tarnish its brand and drive more shoppers to rival retailers.
5. Addressing the antitrust challenges
Last but not least, Jassy will take over as Amazon faces intensifying antitrust pressure in the U.S., Europe, and other markets.
Regulators are accusing Amazon of using data from third-party sellers to create its own first-party products, pushing third-party merchants to use its own fulfillment and advertising services, and other anticompetitive actions. Amazon and Walmart's Flipkart also face antitrust pressure in India over their shared dominance of the country's e-commerce market.
These probes and lawsuits will likely drag on for years, but they could ultimately hurt Amazon's e-commerce business. Jassy must address these antitrust issues to ensure that the company's core marketplaces can continue growing at a healthy rate.
