How Does Amazon Make Money?

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Millions of people around the world know Amazon as a “selling everything” store. Besides online retail, Amazon also operates cloud computing (Amazon AWS), movie production (Amazon Video), music distribution (Amazon Music), print publishing (Amazon Kindle), organic groceries (Amazon Fresh), personal electronics (Amazon Echo Fire) and so on. Amazon also has over 40 subsidiaries, such as Zappos, Whole Food, Audible, etc. Amazon is considered one of the Big Four technology companies, along with Google, Apple, and Microsoft.  In 2018, Amazon became a one trillion-dollar company. Amazon is the most valuable company across the world in 20191.  Amazon's annual net income for 2019 was $11.588 Billion, a 15.04% increase from 2018 and a 281.80% from 20162. What is driving the rapid net income growth? How does Amazon make money?

Amazon divides its business into three segments: North America, International, and AWS3. The first two segments, North America and International refer to Amazon’s retail business. Online retails is the primary revenue source for Amazon; however, online sales are not actually the biggest moneymaker for the company. The reason behind it is Amazon does not make much money on the product is sold on Amazon after considering the operational costs, such as shipping cost. The Amazon Web Services (AWS) has generated the majority of the company’s operating income since 2016. AWS is Amazon’s cloud computing division comprised of a huge network of servers providing processing and storage solutions for companies, government agencies and individuals. In 2019, AWS sales increased 37% compared to the prior year and AWS brought in 9.2 billion in operating income, which is accounted for 63% of the company’s operating income4. Amazon looks like a cloud storage company with an online retail business on the side.

Besides Amazon Prime subscriptions, Amazon also makes money through the third-party marketplace as it has a large number of affiliates. They are willing to get a cut of their all product sales that are made on Amazon. Amazon takes about an average of 13% cut of the sales and also collects fees for storage and shipping. In 2019, Amazon generated 53.76 billion U.S. dollars in third-party seller service revenues, up from 42.75 billion U.S. dollars in the previous year5. Additionally, Amazon Advertising Services is one of the company's fastest-growing businesses. As Amazon has become the center of commerce for a lot of businesses, it is becoming a huge advertising play as well. Some analysts predict the advertising will be more profitable than AWS by 20216.

Do you think Amazon will continue to grow in the next few years? Please leave your comment below.

Reference:

1Guttmann,A. (2019, August 5). Brand value of the most valuable companies worldwide in 2019. Statista. Retrieved from https://www-statista-com.library.sheridanc.on.ca/statistics/269444/brand-value-of-the-most-valuable-companies-worldwide/

22019 Annual Report. Amazon. Retrieved from https://s2.q4cdn.com/299287126/files/doc_financials/2020/ar/2019-Annual-Report.pdf

32019 Annual Report. Amazon. Retrieved from https://s2.q4cdn.com/299287126/files/doc_financials/2020/ar/2019-Annual-Report.pdf

42019 Annual Report. Amazon. Retrieved from https://s2.q4cdn.com/299287126/files/doc_financials/2020/ar/2019-Annual-Report.pdf

5Clement, J. (2020, May 4). Third-party seller share of Amazon platform 2007-2020. Statista. Retrieved from https://www-statista-com.library.sheridanc.on.ca/statistics/259782/third-party-seller-share-of-amazon-platform/

6Kim,T. (2018,August 13). Amazon’s advertising profits will surpass its cloud computing income by 2021: Piper Jaffray. CNBC. Retrieved from https://www.cnbc.com/2018/08/13/amazons-advertising-profits-will-surpass-its-aws-income-by-2021-pipe.html

 

 


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