Amazon was not profitable in 2022. On about $514 billion in revenue for 2022, Amazon generated a net loss of 2.7 billion. It was since 2014 Amazon didn’t record a net loss. Indeed, in 2014 Amazon reported a net loss of $241 million, and it was profitable until 2021. In 2022 Amazon turned unprofitable again.
Amazon has a diversified business model. In 2022 Amazon posted over $514 billion in revenues, while it posted a net loss of over $2.7 billion. Online stores contributed almost 43% of Amazon revenues. The remaining was generated by Third-party Seller Services, and Physical Stores. While Amazon AWS, Subscription Services, and Advertising revenues play a significant role within Amazon as fast-growing segments.
As of 2021, Amazon AWS is a major contributor to Amazon’s operating and net income.
That is because AWS has different unit economics logic:
Born as an infrastructure built on Amazon’s infrastructure, AWS has become a company offering cloud services to thousands of clients from the enterprise level to startups.
And its marketplace enables companies to connect to other service providers to build integrated solutions for their organizations.
Amazon’s cost structure today
Both the North American and International segment of Amazon are running at negative margins. Indeed, in 2022, for the North American segments, of almost $316 billion in revenue, Amazon spent almost $319 billion in operating costs to run it, thus it generated $2 billion in operating losses in 2022.
For its International segment, of $118 billion in revenue, Amazon spent almost $126 billion to operate it. Thus, it reported a $7.7 billion operating loss.
While for AWS, with $80 billion in revenue, Amazon spent $57 billion to operate it, thus generating almost $23 billion in operating income.
The high operating costs are primarily due to the high cost of running Amazon’s inventory and fulfillment infrastructure behind its e-commerce operations. Indeed, Amazon is as much as a physical player as a digital one.
The interesting take about Amazon, which many are not aware of, is the fact that its core business (the e-commerce platform) is also, and still, unprofitable.
Amazon is subdivided into three operating profit segments: North America, International, and AWS. Amazon AWS is the most profitable segment, with almost $23 billion in operating profit in 2022. While Both the North American and International segments run at negative operating losses, with $2 billion and $7.74 billion in operating losses, respectively, in 2022.
As you can see, both the North American and International segments are unprofitable.
Nonetheless, in that segment, there are businesses like Amazon Ads and Prime, which might be running at excellent gross margins!
And the picture is even more impressive if we look at Amazon’s profitability without AWS!
Amazon was not profitable once AWS was removed in 2022. In fact, Amazon, without AWS generated $10.6 billion in operating losses. While Amazon, without AWS, generated $12.2. billion operating income.
It’s easy here to dismiss Amazon and say, “wow, after decades in business, the company is not yet profitable.”
But wait for a second.
Before you dismiss it, there are a few considerations to make.
Bits and atoms
First, Amazon isn’t just an e-commerce company. Amazon is about inventory and fulfillment as much as it’s about e-commerce.
That’s the nature of its flywheel!
Inventory and fulfillment are very intensive in terms of capital requirements, and yet they are critical for enabling customer experience.
And the good news? They give the company much stronger moats.
Over time, anyone might be able to replicate Amazon’s e-commerce.
But a combination of e-commerce, inventory, and last-mile delivery?
In short, a liquid network effect is when a platform business has built such an infrastructure that there is plenty of supply and demand to rely on, and those sustain themselves in a sort of smart dynamic market.
When that happens, a company that has empowered such liquid networks can go on and try to transfer them across a new industry.
One example of this is how Uber, starting from ride-sharing, first expanded this market to become a multi-billion dollar one.
Then it managed to expand into adjacent segments like delivery and freight.
Uber’s mobility platform generated $14 billion in 2022, followed by the delivery platform (Uber Eats), with $10.9 billion in revenue, and the freight platform, with $6.95 billion in revenue. The mobility platform still represents the core business model of Uber, and it has accelerated again after the end of the Covid-19 pandemic. On the other hand, thanks to the company restructuring in the last few years, Uber has built two multi-billion dollar segments from delivery and freight, on top of the core platform.
When you have transferable network effects, you don’t think about a single industry but start thinking about the entire industry, which can be unified under a single paradigm.
For instance, you don’t want to call Uber a ride-sharing, delivery, or freight company today.
Instead, you want to call it a Last-Mile Platform!
A last-mile platform can tackle any industry which relies on the last-mile problem, which states that the most challenging part of a delivery network is in the last mile (or, if you wish, in the last steps) from the company to the customer.
These last steps in the networks, indeed, are a trillion-dollar issue.
These last steps fall outside the network, making it fragmented, unreliable, and expensive.
Thus, when you re-frame the kind of problem a company like Uber and perhaps Amazon is trying to solve, you understand the real potential value of the network!
In short, the sort of network effects that might make you able to launch a whole new business much more quickly by simply leveraging on the existing tech platform!
While figuring out how to unify the networks and make them less and less fragmented.
If you can figure out that problem, you can transfer it across many industries, thus, redefine them!
Built for scale!
When we look at Amazon’s e-commerce platform, it’s critical to consider that since the onset, it has been built for scale and reach.
In short, the e-commerce platform aims to enable as many customers as possible via convenience, variety, and service.
That’s it!
Amazon might make money from it in the future, but it might well be that in 20 years, the e-commerce platform will still be primarily run for scale and reach through convenience, variety, and service.
And it’s worth remembering that thanks to this strategy, Amazon was propelled into “Walmart Status!”
In 2022, Amazon closed its divide in terms of total revenue, as it generated over $513 billion in revenue, compared to over $572 billion in revenue from Walmart.
It took Walmart sixty years to get there, while Amazon took less than thirty years…
The digital ads empire
Now take the case of the Amazon e-commerce platform and Amazon Ads.
And to put things in context, Amazon Ads were larger than YouTube Ads in 2022.
With a core difference, Amazon’s ads segment is just one of the many moving parts for the company!
And we can easily guess that the ads segment might be highly profitable and scalable.
So, if Amazon scaled this to a hundred billion per year business, would e-commerce finally become profitable due to the ads platform?
The AWS rocket ship
In the meantime, Amazon AWS keeps growing at a staggering rate.
Amazon AWS (cloud) is the most successful business segment within Amazon, and it generated over $80 billion in revenues in 2022 and almost $23 billion in operating profit. Compared to over $62 billion in revenues in 2021 and $18.5 billion in net profits.
Of course, as competition in the cloud industry intensifies, this might slow down revenue growth and profitability.
However, it’s worth pointing out that now only is Amazon AWS a tech giant for its own sake, but also how instrumental it will be for the current AI revolution.
Indeed, AI models, that rely on massive computational power through AI supercomputers need an infrasctructure like AWS to run in the first place.
Take the case of how Stability AI has pre-trained Stable Diffusion on top of AWS!
Amazon has a diversified business model. In 2022 Amazon posted over $514 billion in revenues, while it posted a net loss of over $2.7 billion. Online stores contributed almost 43% of Amazon revenues. The remaining was generated by Third-party Seller Services, and Physical Stores. While Amazon AWS, Subscription Services, and Advertising revenues play a significant role within Amazon as fast-growing segments.
In 2022, most of Amazon’s revenue came from the US, with over $356 billion in revenue, followed by Germany with $33.6 billion, the UK with $30 billion, Japan with $24.4 billion, and the rest of the world generated almost $70 billion in net sales.
Both the North American and International segment of Amazon are running at negative margins. Indeed, in 2022, for the North American segments, of almost $316 billion in revenue, Amazon spent almost $319 billion in operating costs to run it, thus it generated $2 billion in operating losses in 2022.
For its International segment, of $118 billion in revenue, Amazon spent almost $126 billion to operate it. Thus, it reported a $7.7 billion operating loss.
While for AWS, with $80 billion in revenue, Amazon spent $57 billion to operate it, thus generating almost $23 billion in operating income.
The high operating costs are primarily due to the high cost of running Amazon’s inventory and fulfillment infrastructure behind its e-commerce operations. Indeed, Amazon is as much as a physical player as a digital one.
Amazon was not profitable once AWS was removed in 2022. In fact, Amazon, without AWS generated $10.6 billion in operating losses. While Amazon, without AWS, generated $12.2. billion operating income.
Amazon is subdivided into three operating profit segments: North America, International, and AWS. Amazon AWS is the most profitable segment, with almost $23 billion in operating profit in 2022. While Both the North American and International segments run at negative operating losses, with $2 billion and $7.74 billion in operating losses, respectively, in 2022.
In 2021, Amazon generated almost $470 billion in revenue, vs. eBay’s over $10.4 billion. In comparison, looking at revenues, Amazon was 45x times larger than eBay.
Amazon’s mission statement is to “serve consumers through online and physical stores and focus on selection, price, and convenience.” Amazon’s vision statement is “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.”
In the Amazon Shareholders’ Letter for 2018, Jeff Bezos analyzed the Amazon business model, and it also focused on a few key lessons that Amazon as a company has learned over the years. These lessons are fundamental for any entrepreneur, of small or large organization to understand the pitfalls to avoid to run a successful company!
Amazon has a business model with many moving parts. The e-commerce platform generated $220 billion in 2022, followed by third-party stores services which generated over $117 billion; Amazon AWS, which generated over $80 billion; Amazon advertising which generated almost $38 billion and Amazon Prime, which generated over $35 billion, and physical stores which generated almost $19 billion.
The Amazon Working Backwards Method is a product development methodology that advocates building a product based on customer needs. The Amazon Working Backwards Method gained traction after notable Amazon employee Ian McAllister shared the company’s product development approach on Quora. McAllister noted that the method seeks “to work backwards from the customer, rather than starting with an idea for a product and trying to bolt customers onto it.”
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.
In the letter to shareholders in 2016, Jeff Bezos addressed a topic he had been thinking quite profoundly in the last decades as he led Amazon: Day 1. As Jeff Bezos put it “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
