Amazon is finally a services company and that's the only reason it's profitable

Published Thu, Oct 28 20218:36 PM EDT

Amazon on Thursday reported earnings for the third quarter, and the results revealed a major underlying shift: The company is now a services business. Despite those truckloads of brown boxes being delivered to consumers around the world, Amazon is getting more revenue from cloud computing, Prime subscriptions, advertising and third-party seller services than it is from selling physical products. Amazon generated net service sales in the quarter of $55.9 billion, while net product sales came in at $54.9 billion. It's the first time in Amazon's 27-year history that services eclipsed products. AWS has long been a major profit engine for Amazon, and in the latest quarter it's the only reason the parent company was able to avoid losing money. AWS generated $4.88 billion in operating income in the period, while Amazon's operating profit was just $880 million and net income dropped to $3.2 billion from $6.1 billion a year earlier. Amazon doesn't disclose margins for third-party seller services, which include commissions from marketplace sellers as well as fulfillment and shipping fees, or from its "other" category, which includes advertising. Analysts have forecast Amazon's advertising profits could one day surpass its cloud-computing income. On a call with reporters, Amazon CFO Brian Olsavsky suggested that services revenue topped product sales as a result of tough year-over-year comparisons. Amazon and other retailers are reckoning with decelerating sales growth as the pandemic-induced jump in e-commerce cools off and consumers head back to physical stores. "There is a reality that we're going to have tough comparisons for about three or four quarters here," Olsavsky said. "So that is the reason why revenue not tied to AWS and advertising is lower." Revenue at AWS jumped 39%, beating analysts' estimates, while Amazon's total revenue rose 15%, falling short of Wall Street predictions. The stock dropped 4% in extended trading on Thursday. For well over a decade, Amazon has been on a path toward being more than just an online store, expanding into new categories such as health care, grocery stores, entertainment and devices. Future investments in those areas and others will rely on the hefty profits coming from services businesses like AWS and advertising. It's no wonder why Amazon installed a services expert, former AWS chief Andy Jassy, as its new CEO, when Jeff Bezos stepped down in July.

Andy Jassy, chief executive officer of Amazon.Com Inc., speaks during the GeekWire Summit in Seattle, Washington, U.S., on Tuesday, Oct. 5, 2021.

David Ryder | Bloomberg | Getty Images

Amazon on Thursday reported earnings for the third quarter, and the results revealed a major underlying shift: The company is now a services business.