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Table of Contents

Amazon’s business segments

Amazon’s competitors

Amazon’s market value

The bottom line

LearnWealth & IncomeHow Does Amazon Make Money?

How Does Amazon Make Money?

Oct 17, 2022


7 min read

Amazon has disrupted an array of diverse markets. It has upended a range of existing industries and created new ones as online sales. That generated billion in profits.

Amazon.com is America’s largest online retailer and more—a lot more. Starting out as a book merchant in 1994, the Seattle-based company has over the decades offered an ever-expanding range of products and, increasingly, services.

Though the company remains an e-commerce giant, founder Jeff Bezos has used that base to expand into a growing universe of businesses, from high-end supermarket chain Whole Foods Market to online movie streaming to artificial intelligence. The list goes on. Tying it all together is a focus on new technologies, discovering new markets, disrupting old markets, and numerous acquisitions.

Amazon’s business segments

Although dozens of businesses are housed under the Amazon umbrella, its biggest and most profitable divisions include:

  1. Amazon Web Services

Known as AWS, this is Amazon’s web hosting service, which rents out space on servers to corporations and governments that need email services, networking, storage, remote computing, cyber security, and other software as a service (SaaS) solutions. Companies once supported these services on their own servers, but most data storage has migrated to cloud services, representing a fundamental shift in the information technology world.

Although AWS represents less than 15% of Amazon’s revenue,  it is the most profitable part of Amazon, generating 74% of the company’s operating profit. AWS is the leader in the $200 billion marketplace for cloud web services, according to research firm Statista, and as of mid-2022, it held for more than a third of the total—compared to 21% for Microsoft’s Azure, 10% for Google Cloud, 5% for Alibaba, 4% for IBM Cloud, and 3% for Salesforce.

  1. Subscriptions

For all of Amazon’s technological acumen and innovative business model, much of its success derives from an age-old strategy—the use of subscriptions to generate recurring  revenue. AWS itself is a subscription-based service, one that is exceptionally “sticky” in that it is costly and difficult to switch to rival services. Some other examples include:

  • Amazon Prime.

    The company’s flagship subscription service boosts margins by encouraging recurring sales across all of Amazon’s e-commerce properties. For an annual fee of a little more than $100, subscribers are entitled to free shipping on purchases, free access to Amazon Music as well as the company’s streaming service. With more than 200 million subscribers, Amazon Prime , along with other subscription services, generated more than $31 billion in revenue in 2021. It also stitches together some of Amazon’s other subscription services.

  • Audible.

    Amazon bought Audible, the leading audiobook company, in 2008. Although users can purchase books a la carte, the subsidiary makes most of its money through subscription services.

  • Ring.

    This home security and alarm subsidiary, acquired in 2018, is an example of subscriptions enhancing the profitability of a once remarkable but now common product—a video camera doorbell. Owners can view the video of visitors in real-time for free, but if they want to see stored footage of visitors, they need a subscription.

  1. Retail

For Amazon, retail sales arethe biggest revenue driver. Although selling books gave Amazon its start, the company during the past two decades has expanded into a stunning number of product categories. In 2021, Amazon reported $580 billion in gross merchandise sales, surpassing brick-and-mortar-based Walmart for the first time. 

As astounding as that sales figure might seem, there’s still room for Amazon to grow their retail revenue. Among the product categories that Amazon has not yet fully addressed with online stores are jewelry, luxury goods, and groceries.

There are two other important pieces of Amazon’s retail strategy including:

  • Third-party sellers.

    So called third parties sell as much as 55% of the goods offered on Amazon. They utilize Amazon Marketplace, an e-commerce platform for new and used goods, benefiting both Amazon and the sellers who use it. Amazon collects a commission on all the products—but that is just the beginning. There are other services for sellers such as fulfillment, payment processing, distribution, and storage. What does the independent seller get for all these fees? Unequaled access to hundreds of millions of Amazon customers.

  • Physical stores.

    Amazon has been experimenting with a variety of different store concepts in recent years. Among them are Amazon Books, Amazon Pop-Up, and Amazon Go, which allows shoppers to check out without a cashier. In 2016, Amazon paid $13 billion for Whole Foods Markets, the high-end supermarket chain. The chain has been integrated into Prime’s ecosystem with discounts and other perks. Total revenue in 2021 was $4.7 billion.

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  1. Advertising

Amazon’s digital advertising business is burgeoning. Revenue in 2021, the first time it was reported separately,  was $31 billion in 2021, or 6.7% of the total. Those figures rank Amazon behind Alphabet’s Google and Meta Platform’s Facebook in terms of online advertising—but its annual growth rate of 18% is faster than that of its major rivals.

Like its top competitors, Amazon uses a pay-per-click model, meaning advertisers are not charged unless a user clicks on an ad. Unlike most of its social media competitors, however, Amazon is unaffected by Apple’s new privacy update feature under which iOS users can opt out of targeted ad tracking. That is among the reasons that Meta’s Facebook ad revenue declined in the first half of 2022.

Amazon also undercuts advertising rivals on price. Based on average cost per click, its ads are 68% cheaper than Google’s and 44% cheaper than Facebook’s, according to a study by market research firm Sellics.

  1. Other

Amazon is famously tight-lipped about many of its ventures and there may even be in-house businesses that never have been disclosed. Some companies acquired over the years are shut down or quietly absorbed into larger Amazon businesses, such as diaper retailer Quidsi, while others remain stand alone enterprises with distinct corporate cultures, such as footwear retailer Zappos.            

Current stand alone Amazon-owned companies besides Audible and Ring include electronic gadget and hardware retailer Woot, consumer-electronics maker Blink, driverless car maker Zoox, and One Medical, a network of internet-enabled healthcare providers Amazon agreed to buy for $3.9 billion. 

Amazon’s competitors

Rivals to Amazon run the gamut. It operates in so many different niches and categories that it can seem difficult to name a company that doesn’t face off against the company—or could do so in the near future. Here are some obvious ones:

  • Microsoft.

    The fellow Seattle-area software giant competes with Amazon in the cloud, ranking No. 2 in that market.

  • Alphabet.

    In addition to the cloud, the parent company of Google vies for advertising with Amazon; it also has an autonomous vehicle initiative.

  • Walmart.

    The country’s largest brick-and-mortar retailer has upped its online business, although efforts to battle Amazon head on with its online Jet.com unit, acquired for $3 billion, hasn’t paid off.

  • Meta Platforms.

    Along with Alphabet, the Facebook parent battles Amazon for advertising dollars, where it maintains a formidable (but narrowing) lead.

  • Kroger.

    The giant supermarket chain competes with Amazon’s Whole Foods Market. 

  • Shopify.

    The Canadian e-commerce platform caters primarily to small- and mid-sized merchants, to which it also provides payment and shipping services.

  • Etsy.

    The Brooklyn, New York-based e-commerce marketplace operator focuses on craft, vintage, and niche merchants that are less interested in selling via a large internet platform like Amazon.

Amazon’s market value

Amazon’s market capitalization, which is calculated by the number of common shares outstanding times their current market price, stood at about $1.3 trillion as of early September 2022. Only a few companies have larger market caps, including Apple ($2.5 trillion), Saudi Arabian Oil Co. ($2.3 trillion), Microsoft ($1.9 trillion) and Alphabet ($1.4 trillion). For the sake of comparison, the market value of the world’s biggest traditional retailer, Walmart, is $370 billion, while that of the second biggest, Costco, is about $240 billion.

The bottom line

Since its founding, Amazon has disrupted an array of diverse markets, from retailing to advertising to hardware and artificial intelligence. Along the way, it has upended a range of existing industries while pioneering entirely new ones, starting with online sales. In doing so, the Seattle-based company has generated billions in profits, hundreds of thousands of jobs, and spurred economic growth in an unprecedented fashion. 

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