How Amazon Makes Money: e-commerce, advertising, and the cloud
Amazon.com Inc. (AMZN), the world’s largest online retailer, has grown rapidly in a broad range of businesses including its core e-commerce operations, cloud services, and digital advertising. It also sells products such as the Alexa personal assistant and ecosystem, Kindle e-reader, Fire TV, and movies and television shows through its Amazon Prime Video platform. Amazon’s rivals include Walmart Inc. (WMT) and Alibaba Group Holding Ltd. (BABA).
Key Takeaways
- Amazon makes money through its retail, subscriptions, and web services, among other channels.
- Retail remains Amazon’s primary source of revenue, with online and physical stores accounting for the biggest share.
- AWS is Amazon’s largest source of operating profits and is growing fast.
- Amazon’s founder Jeff Bezos stepped down as CEO on August 5, 2021, in favor of Andy Jassy, who was previously the CEO of AWS.
Amazon’s Financials
Amazon ranks as one of the world’s top companies by market value. As of February 5, 2021, Amazon had a market cap of $1.7 trillion.
The company posted net income of $21.3 billion during its 2020 fiscal year (FY), which ended December 31, 2020. Annual net income rose 84.1% compared to FY 2019. Revenue, which Amazon calls net sales, rose 37.6% to $386.1 billion for the year. Profits were fueled by robust revenue growth, but received an additional boost from lower operating expenses as a percentage of total net sales and a shift from logging non-operating expenses in the prior year to posting non-operating income in FY 2020. Operating income grew 57.5% to $22.9 billion.
Amazon’s Business Segments
Amazon divides its business into three segments: North America, International, and AWS. The first two of these segments, North America and International, refer to geographical breakdowns of Amazon’s retail business. They generate revenue from retail sales in North America and the rest of the world, as well as from subscriptions and export sales for those areas.
Retail can further be broken down into online stores, comprising the bulk of sales, and physical stores. Company-wide, online stores accounted for $197.3 billion in sales in FY 2020, or about 51% of net sales, while physical stores generated $16.2 billion in sales, or about 4% of net sales.
North America
Amazon’s North America segment dominates its net sales, accounting for $236.3 billion in FY 2020. That is an increase of 38.4% from FY 2019 and it comprises about 61% of the company’s net sales for the year. Operating income for the North America segment during the year was $8.7 billion, comprising about 38% of the total operating income for all segments. Operating income for the segment rose 23.0%.
Aside from retail, the other primary source of revenue for North America is subscriptions, including Amazon Prime, which offers unlimited free shipping, and unlimited streaming of movies, TV shows, and more.
International
There is one Amazon segment that has not thrived in recent years: the International business. This segment consists of Amazon’s retail business for consumer products and subscriptions for internationally-focused online stores. It also includes export sales from those stores, but not those from North America-focused online stores. The International segment finally generated an operating profit in FY 2020 after at least 3 consecutive years of posting operating losses.
The segment reported operating income of $717 million in FY 2020, compared to an operating loss of $1.7 billion in FY 2019. It accounts for about 3% of the operating income for all segments. Net sales for the International segment grew 39.7% to $104.4 billion, comprising 27% of total net sales.
Amazon Web Services (AWS)
Amazon Web Services (AWS), launched in 2006, provides services to businesses, government agencies, and academic institutions to store information and deliver content. Amazon says AWS provides an “infrastructure platform in the cloud,” for a variety of “solutions” such as hosting applications and websites, providing enterprise IT, and content delivery.
Amazon’s AWS segment generated net sales of $45.4 billion and operating income of $13.5 billion in FY 2020. Net sales grew 29.5% while operating income rose 47.1% compared to FY 2019. Although net sales from AWS are below net sales for the North America segment, AWS’s operating income is substantially higher. The AWS segment accounts for about 12% of total net sales and 59% of operating income for all segments.
Amazon controls about a third of the global cloud market, nearly twice as much as its next closest competitor. AWS’s biggest rivals are Microsoft Corp.’s (MSFT) Azure and Alphabet Inc.’s (GOOGL) Google Cloud.
Amazon’s Recent Developments
On February 5, 2021, Amazon’s request to postpone a union vote at its warehouse in Bessemer, Alabama was denied by the National Labor Relations Board. Workers at the Bessemer warehouse will be allowed to conduct mail-in voting in order to decide whether they join the Retail, Wholesale, and Department Store Union. The workers will start casting ballots by mail on February 8, with voting extending through to March 29. This will be the first major unionization effort within the company since 2014.
Amazon is facing an antitrust investigation into its online marketplace. The investigation is being led by the U.S. Federal Trade Commission and attorneys general from New York and California. The company is facing increased scrutiny over its use of data collected from third-party sellers on its platforms. Both competitors and regulators claim that Amazon is using the information to launch competing products, which violates its own stated policies.
Important
On October 6, 2020, after a 16-month investigation into the business practices of tech behemoths Apple, Amazon, Facebook, and Alphabet, the House Judiciary subcommittee on antitrust released its recommendations on how to reform laws to avoid the continued emergence of digital monopolies. The Democratic-majority staff presented a nearly 450-page report concluding that the four Big Tech companies dominate the industry in ways that affect the U.S. economy and democracy, suggesting Congress implement changes to antitrust laws that could result in parts of the businesses being separated.
How Amazon Reports Diversity and Inclusiveness
As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Amazon and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Amazon releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.
Below is a table of potential diversity measurements. It shows whether Amazon discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Amazon breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and LGBTQ+ identity.
