Advertising Is Masking Amazon’s Unprofitability

Without the high-margin advertising revenue, Amazon’s retail business is increasingly unprofitable. It was at break-even as recently as 2015. Since then, as advertising revenue grew, so did Amazon’s use of that growth to fund the rest of the retail operations.

Amazon’s operating income from retail operations was $6.3 billion in 2021. It would have been a $24.8 billion loss if not for the advertising business. Because advertising has a virtually zero marginal cost, and thus, nearly all of its $31.2 billion in revenue was profit.

Retail operations include online sales, physical stores, third-party marketplace, advertising, and Prime membership (all of Amazon except AWS cloud hosting). Not all of those businesses are equally profitable. According to Amazon quarterly results, operating income ex AWS was $6.3 billion in 2021. That, minus advertising’s naively assumed $31.2 billion income, yields a $24.8 billion loss.

Even if a more realistic 90% or 80% of advertising revenue was treated as profit, the rest of the retail business was still massively in the red. In the fourth quarter of 2021, Amazon’s retail operating loss was $1.8 billion, the highest loss in over six years. It would have been an $11.6 billion loss if not for advertising.

Amazon Retail Business Profitability

“I wonder what unit profitability was in 2017 without advertising?” asked Jeff Bezos during a meeting of Amazon’s senior leadership team, according to Brad Stone’s book, “Amazon Unbound.” “Retail executives considered ads to be a key part of the unit’s performance - not a separate element to be plucked out of their profit-and-loss statement.” That’s why advertising is not a separate business segment with profitability broken out in Amazon’s financials.

Advertising is very clearly Amazon’s most profitable business segment. Both in terms of profit margin and dollars. AWS cloud hosting is often assumed to be funding the rest of Amazon. However, advertising is already nearly half the size of AWS and generates more operating income.

The chart shows the large and growing gap between advertising and the rest of retail operations. Without advertising, Amazon is a retailer operating at a tens-of-billions dollar loss. Eventually, Amazon advertising will grow up to be a standalone advertising network. Today, it’s more akin to endcap fees both because of its functionality and role in retail’s P&L.

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Juozas "Joe" Kaziukėnas

Founder of Marketplace Pulse, Joe wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

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