May 15, 2020
Scaling Amazon Subscriptions and Amazon Ads

Amazon has six major business lines.

But most Wall Street analyst commentary revolves around just the first two.

Investors love to talk about Amazon’s ever-expanding e-commerce business that trumps Costco and Target in product sales. They also love to mention the margins of Amazon’s AWS service, a business line growing at 34% YoY, responsible for 63% of Amazon’s $14 billion in operating income this year.

But two of Amazon’s most exciting businesses rarely get the headline attention they deserve. They’re flying under the radar, growing incredibly fast, and are approaching the scale of entire businesses like Netflix and Facebook.

Those two businesses are Amazon’s advertising business and subscription services. This is what growth rates of those businesses look like in comparison to the growth of AWS.

When we adjust the timeframe to put them all on even ground, this is how their growth rates stack up.

Amazon advertising and Amazon subscriptions are both powerhouse businesses, and I expect 3-5 years from now investors will be looking at these two businesses to drive growth as Amazon’s other business segments mature.

Amazon Advertising

Facebook and Google are widely recognized as the global leaders in online advertising. Google does over $30 billion of digital ad revenue each quarter, Facebook does over $15 billion, and nobody else comes close.

But Amazon is getting there. In 2017, Amazon’s advertising business did roughly $1 billion of revenue each quarter. In 2018, over $2.5 billion per quarter. And in 2019, Amazon’s ad business did over $3.5 billion per quarter.

In fact, Amazon did $4.78 billion of advertising revenue in the fourth quarter of 2019 (growing 41% YoY), more than YouTube’s $4.72 billion (which only grew 31% YoY).

And while Amazon’s ad business still doesn’t stack up to Facebook’s ad business today, what if we go back in time five years? How does the growth rate of Facebook’s ad business five years ago compare to Amazon’s today? It turns out, Amazon’s ad business is growing faster.

Amazon’s ad business in 2016 was doing almost exactly as much revenue as Facebook’s ad business was in 2011. But as we fast-forward, it’s clear that Amazon’s growth from 2016-2019 outpaced Facebook’s from 2011-2014.

Valuing Amazon’s Ad Business

If Amazon’s ad business is outpacing “Facebook of 5 years ago”, how should we look at Amazon’s overall company valuation given this new information? Because Facebook is now a $600B company making 99% of revenues from advertising.

On the surface, it looks like Amazon’s advertising business deserves it’s own $600 billion valuation, but there are other important developments to consider.

Critics of the chart above might point out that Facebook had only just acquired Instagram in 2012, and only began advertising trials on Instagram in late 2013. Today, Instagram is a much more influential platform, contributing a meaningful percentage of Facebook’s overall ad revenue. Does Amazon have the potential to create or acquire an Instagram-sized ad property?

Another possible critique is that as the 2010s have progressed, digital advertising rates have increased steadily, giving Amazon more revenue for less ad inventory compared to Facebook five years prior.

Both are valid arguments. But there's no doubting that Amazon’s ad business is on a rocket-ship trajectory right now.

What makes Amazon’s advertising business so powerful?

For one, Amazon lets advertisers leverage their one-click buying experience, increasing conversion rates compared to third-party advertising platforms like Facebook and Google.

Another reason for Amazon’s success? Focused intent. People only ever visit Amazon when they’re ready to buy things. So by the time you see a search ad for a new TV, you’re already half-sold on buying it. Because you explicitly searched for it. In contrast, people primarily visit YouTube and Instagram for entertainment, not to buy.

While Google and Facebook are trying to mimic Amazon’s native shopping experience by allowing customers to buy items directly through Google Shopping, YouTube, and Instagram, those efforts aren’t major revenue drivers for either company today. Amazon still has the upper hand on conversion rates and user intent.

Amazon Subscription Services

The most amazing part about Amazon’s business is how well all their key business segments work together. Advertising drives online sales, which drives their subscription business, which drives their physical store business. Amazon’s consumer business lines all work together.

And Amazon has seen incredible success with their Prime program as a result. Over 150 million households around the world now have Prime memberships, but it’s tough to grasp the scale of 150 million subscribers in isolation.

For some perspective, let’s compare Amazon’s subscription business to one of the world’s most popular subscription companies. Netflix.

The growth of Netflix has been incredible over the last few years, and has rightfully received a lot of press coverage for it. But almost nobody talks about the fact that Amazon’s subscription revenues are growing even faster. They’re even on pace to pass Netflix’s overall company revenue sometime this year.

Critics will point out that Amazon Prime is a bundled subscription offering, with many different services like free shipping, photos, music, and videos bundled into one. Fair points, this chart isn’t meant to imply that Amazon’s video business is better than Netflix’s. Just that the scale of Amazon’s subscription business is almost unmatched - and it still gets overshadowed by Amazon’s other segments.

Bottom Line

With so many high-performing businesses operating at a global scale under the Amazon brand, betting against Amazon is a bet that multiple business lines fail in sync with each other. Every time one Amazon business looks like it has reached maturity, two more powerhouse businesses seem to appear.

A bet against Amazon is like betting against a conglomerate that consists of 1995 Walmart, 2014 Facebook, 2019 Netflix, all rolled up into one company. And that doesn’t even consider Whole Foods, AWS, and Amazon’s third-party seller business. The scale that Amazon is operating, and winning on, is truly mind-boggling.

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