Home Commerce Amazon Juices Profits, With A Big Assist From The Ads Biz

Amazon Juices Profits, With A Big Assist From The Ads Biz

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Wall Street wanted profits. Big Tech delivered.

That was the case for Google, Meta, Microsoft, Apple and – more than any other US tech giant – Amazon.

In 2022, Amazon lost $2.7 billion as it managed a larger employee base, inflation and massive supply-chain issues (the start of the Russia-Ukraine War, for one). Last year, though, Amazon netted more than $30 billion in profits, with $10.6 billion in Q4 alone, according to the company’s earnings report on Thursday.

The profitability in particular was helped by new advertising.

Amazon’s Advertising Services revenue grew to $14.7 billion in Q4 2023, up more than $3 billion in net-new spend compared to the year prior. And advertising is the fastest-growing and highest-margin part of the business.

The ad margin

Amazon’s operating margins have improved for seven straight quarters, an impressive feat, noted Evercore analyst Mark Mahaney on the investor call. But should investors expect that pace of cost control and profit improvement to continue?

Well, actually, yes. And a big part of the reason why comes down to advertising.

Amazon has improved the efficiency of its warehouse system, particularly in North America, which is a major cost driver. But CFO Brian Olsavsky noted on the call that another profit margin tailwind comes from “success in advertising revenue growth that’s outpaced our traffic growth rates.”

Advertising revenue grew by 27% year over year, compared to AWS and online marketplace sales, which grew between 10% and 12%. And advertising is more a high-margin business than ecommerce fulfillment or cloud infrastructure, so as that ad business outpaces other units, it should improve Amazon’s overall profitability.

“It’s an important part of the total business model,” Olsavsky said of the ad business, “and we expect it will allow us to have a healthy business to continue to invest in content and to continue to grow.”

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The ad pool

Amazon has good reasons to expect a major jump in advertising revenue this year.

Check back one year from now, for instance, and the year-over-year growth comparisons for its ads business could be through the roof.
That’s because Amazon just began serving ads to some hundred million Amazon Prime Video subscribers this week. It is rare for a large, mature ad business like Amazon’s to suddenly unlock such a mammoth and lucrative pool of new inventory. Prime Video could become a top CTV ad seller practically overnight; whereas Netflix remains ad-free for subscribers unless they actively switch to advertising, and so remains a relatively low-supply channel.

“I can’t scale it right now,” Olsavsky said of the new Prime Video ads business (meaning, he won’t provide numbers or give a sense of the scale so soon). “We are looking for ways to increase our advertising in our streaming properties.”

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