#8: Ads - the other profit engine of Amazon

As Amazon's profitability was discussed in a previous post, now is the time to start talking about the profit engines of the company. Prime is necessary for the company's profitability, but it is not directly producing profits.

The first important profit engine is the Ads business. For a long time, Amazon regarded ads as something inferior that other companies are doing. However, over the last decade, Amazon has realised the profit potential in the ads.

Similarly to Google and Facebook, Amazon has crucial information about its customers, and a lot of customer traffic is looking for products to buy. Therefore, it is natural that Amazon would eventually start selling ads.

Despite its business potential, ads were distracting to the most sacred of them all, the customer journey on the Amazon website. After much experimentation, the company was faced with a decision whether it would put sponsored products at the top of the search results. According to the Amazon Unbound book by Brad Stone, it boiled down to Jeff Bezos to decide whether ads could disrupt the customer experience.

He went with the ads; nowadays, a big part of the search results are ads.

During the last 12 months, Amazon has generated almost $36 billion in revenue from ads, which is highly profitable.

To illustrate the growth of the ad business, the ad revenue has grown from $3 billion in Q3/2019 to $9,5 billion in Q3/2022.

Another way to illustrate the scale of the Ads business is to compare it to the marketing spend of Amazon. For Amazon it is beneficial to spend money on marketing to drive customers to the platform. As the traffic on the site increases, Amazon gets more Ad revenues from sellers who want to promote their products on the platform.

Ads business has also been influential in driving the retail business's profitability. However, during the last couple of years, the operating income of the retail industry has been negative. The picture changes significantly when one removes the ad revenue from the operating income of the retail division.

The other significant profit engine of Amazon is the hallowed cloud business, AWS, which is the topic for the next post 

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