Amazon’s Q4 2020 earnings last week were understandably dominated by news that CEO Jeff Bezos is stepping down in Q3 2021, to be replaced by Amazon Web Services chief Andy Jassy. Plus, the company’s earnings were consistent with the past few quarters: Amazon is firing on all cylinders. One tidbit that flew under the radar: Amazon’s “Other” business segment, which consists mostly of its advertising business, surpassed its “Subscription services” segment.
As the go-to ecommerce destination in many countries, Amazon knows plenty about what its customers buy, want to buy, and don’t want to buy. Since most of the company’s ad revenue comes from the sponsored ads on product pages and in product search results, its advertising business has accelerated along with its online shopping business during the pandemic.
“I would say that there’s been a recovery in advertising spend as the year progressed,” CFO Brian Olsavsky said on the Q4 earnings call.
Another factor, Olsavsky said, was Amazon’s decision to move Prime Day into the fourth quarter, bringing “a lot of clicks and eyeballs” that drove higher advertising revenue.
In addition, he said, the company has worked to improve the tools used by sellers, vendors, and other partners to navigate and generate maximum revenue from its advertising systems. Amazon is using a deep learning model to boost the relevance of sponsored products shown to individual users, Olsavsky said. The company has also seen rapid adoption of video ads, he said.
For years now, AWS has been Amazon’s second biggest revenue driver, after its main ecommerce business. But “Other” is the fastest-growing segment, which means advertising could have an increasingly larger role to play for the retail giant going forward:
This is part of a larger pattern. Since Q3 2019, the Other segment has seen steady year-over-year growth ranging from 41% to 49%. In Q4 2020, that figure jumped 64% to $7.95 billion.
That spike is in line with gains from advertising giants Google and Facebook. “It was up $2.5 billion sequentially, which is a lot, but FB and GOOGL were up by a lot more in dollar terms, and product searches start on AMZN,” Wedbush analyst Michael Pachter told GeekWire. “It’s not really surprising in the context of their sales growth.”
Some analysts expect Amazon to gain advertising market share this year.
By comparison, AWS growth has been steadily declining and is now in the sub-30% range. If these trends hold, Amazon’s “Other” segment could start to rival AWS in the next few years.
Amazon’s ‘Ads and other’ business did $21.5bn of revenue in 2020. That only needs a 63% operating margin to be producing more operating income than AWS (Alphabet is at 55% ex TAC and R&D, and how much can ads be costing Amazon, really?)
— Benedict Evans (@benedictevans) February 3, 2021
Amazon’s “Other” segment does not solely consist of ads, so this isn’t a perfect comparison. But Amazon is working hard to make it a reliable revenue stream and it appears to be quietly becoming a big profit driver.
At some point after Jassy assumes the helm in Q3 2021, he may break out Amazon’s ads business as a separate line item. It won’t be the first order of business, nor is it likely to happen without the green light from Bezos. When it does, however, Jassy might just use it to signal his transition from CEO of AWS to CEO of Amazon is complete.
