People argue about Amazon a lot, and one of the most common and long-running arguments is about profits. The sales keep going up, and it takes a larger and larger share of US retail every year (7-8% in 2019), but it never seems to make any money. What’s going on?

Well, to begin with, this idea itself is a little out of date: if we zoom in on that net income line, we can see that Amazon’s profitability appears to have shot up in the last couple of years. But what else is going on?

An obvious response here is that all of the profit is coming from AWS: it’s easy to assume that AWS’s profits subsidise losses in the rest of the company. By extension, if anti-trust intervention split AWS apart from the rest of the company, those cross-subsidies would go away and Amazon would have to put up prices, or grow more slowly, or at any rate be a less formidable and aggressive competitor.

That doesn’t really stand up to examination.

AWS has been around in some form since the early 2000s, but Amazon didn’t disclose financials, and the products looked so cheap that many people presumed that it must be making a loss. Then, in 2015, reporting regulations meant that Amazon had to start giving numbers (with historic figures back to 2013), and we discovered that in fact it was hugely profitable. Hence, in 2015 and 2016 AWS was the great majority of Amazon’s reported operating income. (Read more...)