Looking beyond e-commerce: How AWS & Advertising became the new cash cows for Amazon
Online retail or e-commerce is practically synonymous with Amazon - 66% consumers today use Amazon to search for products, more than search engines like Google (49%) or YouTube (26%). The company has 310 million customers worldwide - that’s as many shoppers as the entire population of the US! On the supply side, nearly 2 million small and medium businesses use Amazon to sell their products. The retail giant generates $1.29 billion dollars in sales revenue every single day! However, e-commerce is not the reason why Amazon keeps afloat. While e-commerce drives the top line for the business, the bottom line is a completely different story. When you look beyond e-commerce, the real drivers of Amazon’s growth are quite unrelated to retail of any kind. For example, while the share of AWS, Amazon’s cloud business, in the company’s overall revenue stands at just 13%, AWS generates nearly 74% of the company’s profit! In this article, we explore why AWS, advertising & other non-retail businesses are the actual drivers of Amazon’s global success story.
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The problem of profit-less growth has been something that Amazon had been trying to get out of for a long time. While Amazon began its operations in 1994 & went public by 1997, the company remained unprofitable till 2001, when it turned a meager profit of $5 million with revenues of well over a billion dollars. In order to sustain its growth, the company had to find a way to improve its bottom line. The first major step in the direction of profitable growth was in the form of its Prime membership, which was launched in 2005. Taking a cue from Costco’s massively successful membership based retail model, Amazon decided to further integrate the customer into its ecosystem using Prime. This proved to be a great move for Amazon - as of 2021, there are over 200 million Prime members across the globe! In 2006, the company decided to go beyond retail and decided to enter the cloud computing market, a completely unrelated business that seemed rather odd at the time. However, that decision proved to be the most important decision for Amazon!
AWS is unquestionably the crown jewel of Amazon. The cloud computing business single handedly runs the entire ship! After all, AWS contributes more than 74% of the company’s overall net income. AWS generated $62 billion in revenue in 2020, accounting for just 13% of Amazon’s total revenue that year. However, the bottom line of Amazon is practically sustained by AWS year over year. In 2018, Amazon’s total operating profit stood at $12.4 billion - 58% of which, or $7.2 billion was from AWS. By 2020, Amazon’s total operating profit had doubled to $24.8 billion. AWS’s operating profit for the year stood at $18.5 billion - a whopping 74% of Amazon’s total operating profit that year! Today, AWS is the undisputed leader of the highly competitive cloud computing market with 33% market share as of Q4-2021 - more than that of its two primary competitors, Microsoft(21% market share) & Google(10% market share) combined! Over a million organizations across the globe, including giants like Netflix, Twitter and even the US & Canadian Federal Governments use AWS to run their organizations!
In 2021, Google, Meta & Amazon accounted for 74% of the total money spent on digital advertising globally! Driven by the Covid-19 pandemic, the mass adoption of digital marketing established the clout of the Big Three in online advertising. The steady stream of data about consumer’s buying decisions made Amazon the natural choice of advertisers for targeted ads. Furthermore, Amazon had to move beyond AWS, its “expensive” cash cow. Although AWS accounted for 74% of the company’s profits, it also accounted for over 50% of Amazon’s capital expenditure budget. Amazon’s nascent advertising business had been doubling year over year to reach $10 billion by 2018. By 2020, the business had again nearly doubled to reach $19 billion. Advertising is a highly profitable business and Amazon has access to a goldmine of consumer data to run this business successfully for the long term. Today, Amazon’s advertising business has surpassed that of YouTube! In 2021, Amazon reported an ad revenue of $31 billion, higher than that of YouTube’s $28.8 billion. Armed with these 2 cash cows, Amazon is set to dominate the world of retail for a long time to come!