Its focus is shifting from retail to online ads and services, which is good news for ‘Main Street’, not so much for Facebook and Google, says Conor Sen.
WHEN people think about Amazon disrupting the economy, they focus on physical retail — all those disappearing bookstores — but the company’s fourth-quarter earnings report makes it clear that it’s increasingly moving onto the turf of other tech companies.
Amazon’s fastest growth is in ads and Amazon Web Services. Amazon’s ‘other’ line of business, which “primarily includes sales of advertising services”, did $10bn of revenue in 2018 and grew 97% year-over-year in the fourth quarter.
Meanwhile, Amazon Web Services, its profit engine for the past several years, grew at a rate of 46% over the past year. While these two accounted for only 15% of Amazon’s revenue in the fourth quarter, they accounted for 33% of revenue growth.
Amazon’s business lines in the physical storage and delivery of goods, on the other hand, no longer look fast-growing. Online stores — customers buying products and digital media on Amazon, excluding third-party sales — grew 14% year-over-year in the fourth quarter.
Physical stores — largely the Whole Foods acquisition — actually showed a slight decline in the fourth quarter, though, when adjusting for calendar issues, produced modest growth. While online and physical stores combined represent 61% of Amazon’s revenue, they represent only 36% of revenue growth, roughly the same as ads and Amazon Web Services.
There are a couple reasons for these diverging trends. On the digital side — ads and web services — Amazon is earlier in attacking the market than it was in physical retail.
Global ad sales alone, for instance, are over $500bn, meaning Amazon still has less than 2% market share.
Physical retail, or at least the e-commerce piece of it, has been Amazon’s focus for more than 20 years now. It’s hard to keep growing rapidly in any market after a certain point.
But there’s also the cost side. Retail is a famously low-margin business, and costs for the kinds of things Amazon needs to do to grow its e-commerce operation are rising rapidly throughout the economy.
But there comes a point, given Amazon’s existing size, at which continuing to grow rapidly becomes increasingly difficult, particularly with the tight labour market.
So it makes sense that when Amazon thinks about where to allocate its dollars to grow, it would focus more on its under-penetrated, higher-margin digital-services business lines, rather than its more-mature, lower-margin e-commerce operations.
To the extent that the public’s fascination with Amazon is about what businesses it’s disrupting, that conversation may need to shift.
Perhaps Amazon’s dominance of all e-commerce and physical retail isn’t as inevitable as some think, and there comes a point where shipping low-cost goods isn’t economical, particularly not for middle-class consumers, for whom price can matter more than convenience. Barring big acquisitions, like Whole Foods, maybe the competitive position of Walmart, grocery stores, and 21st-century shopping malls and mixed-use developments is pretty good.
On the other hand, it’s tech companies that have to watch their backs when it comes to Amazon. If Amazon grows its advertising business from $10bn to $50bn over the next several years, it’s likely that some of that growth will come at the expense of the current digital advertising duopoly of Google and Facebook.
And the continued rapid growth of Amazon Web Services is probably bad news for other large companies in the enterprise technology market.
This may turn out to be a welcome development for ‘Main Streets’ across the globe, which may no longer bear the brunt of job losses, as Amazon shifts its growth focus elsewhere.
But for tech companies and local economies in the San Francisco Bay area, the Amazon disruption may be just beginning.
- Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.