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In this week’s article, we will be finishing our round up of earnings reports of the rest of the big tech, namely Amazon’s, Facebook’s, and Google’s earnings. We will also compare Amazon’s ad revenue with other social media giants.
Amazon’s Q4 Earnings
It is no secret that Amazon is one of the biggest winners in 2020. The pandemic did not just force an accelerated adoption of ecommerce, but also digital transformation that has been a boon for Amazon’s cloud business (we did a deep dive on Amazon’s many businesses. You can find Part 1 here and Part 2 here).
Here are three key takeaways:
The first takeaway: Top line beat expectations. Despite the strong expectations, the company beat investors estimates again. Revenue for Q4 2020 was US $125.6 billion (the first time the company crossed the 100 billion quarterly mark). This is a 44% jump compared to the same period last year, beating analysts’ estimate of US 119.7 billion.
The second takeaway: Small segments of Amazon’s businesses are becoming big (see Figure 1). Take Ads and Other businesses for example. In Q4 2020, that segment makes about US $8 billion (a 66% increase year-over-year), more than Physical Stores and Subscription Services.
For the entire year of 2020, the Ads segment made about US $21.4 billion in net sales. That’s almost 1/4th that of Facebook – this is quite amazing considering for Amazon, this is a side business. (we will revisit this point later in this article).
Meanwhile the AWS segment contributed about 12% of Net Sales but more than half profits (Operating Income) for the company (Figure 2 – grey bar). And interestingly, the accelerated ecommerce adoption in the international market also pushed that segment into profitability in the last three quarters of 2020.
The third takeaway: Jeff Bezos is stepping down. After 27 years at the helm, Jeff Bezos plans to step down from the CEO position, in Q3 2021, to become the Executive Chairman. The most interesting part of this announcement is the selection of Andy Jassy as the next CEO.
Jassy is the current CEO of AWS – his promotion indicates that Amazon plans to emphasize the importance of AWS even more. It’s an indication that Amazon wants to become a cloud company first and ecommerce second.
This selection echoes the selection of Satya Nadella, who led Microsoft’s cloud business before he was chosen as CEO in 2014. Microsoft has been on a tear since. Under Nadella, the company restructured and refocused itself into the second largest cloud provider after Amazon.
As to what Jeff Bezos will do after stepping down? He said that he intends “to focus my energies and attention on new products and early initiatives.” This means that he will still be involved in important strategic discussions. But one thing is clear, he will not have to appear before the future congressional hearings in the brewing antitrust investigations that big tech will be facing (unlike Bill Gates).
Facebook Q4 Earnings
Propelled by strong ecommerce growth in Q4 2020, Facebook announced earnings that beat expectations. Here are three key takeaways:
The first takeaway: Facebook beat expectations. It generated US $28.1 billion in revenue (vs. expectations of US 26.4 billion). The revenue outperformance is driven not by increase in user base, but rather the cost per impression increase of Facebook’s ad inventory (which is the result of higher demand from ad buyers).
The second takeaway: As a result, the average revenue per user (ARPU) increased. For Facebook’s most lucrative region (US and Canada), the ARPU went up from US $41 per user in Q4 2019, to US $54 per user in Q4 2020!
As a sidebar – people sometimes speculate – “Why can’t Facebook just let users pay for the service and have these users opt out of advertising, a premium Facebook experience so to speak”. Well – we can quantify that price point – In 2020, Facebook made US $163 from an average user living in the US and Canada. Will anyone pay this amount to be rid of ads? I doubt it…
After a slow-down in ARPU growth in Q3, growth returned in Q4 2020 (Figure 4).
The third takeaway: Apple and Facebook are in a fight. Here’s their conflict briefly explained:
- In March 2021, with the release of the next iOS 14, Apple will mandate that users be asked before being tracked for using a specific app. This tracking is typically used to optimize ad targeting. See Figure 5 and notice the difference in language. When asking to opt out for 3rd party tracking (left), Apple’s language is a lot scarier than Apple’s own advertising tracking (right). When this is implemented, the rate of people that opt out of 3rd party tracking will increase.
- Apple said it’s doing this for the sake of privacy. While it’s true some apps track you to monetize and sell your data (that weather app you download, speed test app or keyboard app might be tracking more data than their core purposes to resell to third parties) there are other very legitimate apps and small businesses that rely on tracking to acquire customers.
- Facebook stands to be most harmed by this move – since in the long run, the move will hamper Facebook’s ability to efficiently target iOS users, which is critical for businesses and apps that rely on Facebook to get their app discovered by users.
- Coincidentally, along with this announcement, Apple updated its own ad distribution system (which was lagging compared to competitors) to enable advertisers to do more granular tracking and attribution – bringing it close to parity to Facebook’s tools.
- So there’s an appearance that on one hand, Apple is hampering ad tracking of 3rd parties while on the other hand bolstering their own. Because of this Facebook has accused Apple of using its dominant position to interfere with other apps and to preference their own solutions.
- For Apple, it is likely that Privacy was a consideration. But what is likely true is that Apple wanted to retake control of app discovery from Facebook back to the App store, and increase its Services revenue (Apple’s own ad network).
- In the short and medium term, Facebook’s 2021 revenue derived from app install ads (think games or freemium ads) will face significant headwinds.
Google’s Q4 Earnings
Continuing the trends we’ve been seeing, Google also posted record earnings from its ads.
Here are three key takeaways:
The first takeaway: The company posted a record US $56.9 billion revenue (up 32% year-over-year, beating forecast). The primary driver of revenue is ads from YouTube, which increased 46%. Google believes that YouTube now reaches more prime audiences between 25 and 49 years old than all of cable networks combined.
The second takeaway: This earnings report is the first time Google separated the Cloud business into its own segment, giving us a glimpse of its profitability (see Figure 6). Yes – Google Cloud revenue grew 46% from 2019 to 2020, but it’s still not yet profitable (orange bar in Figure 5). It’s still very early days for the cloud business. Google is behind, in terms of both timing and ability to sell to enterprise customers, when compared to its main chief cloud competitors (Amazon and Microsoft). So now, it’s playing catch up – it is investing heavily in direct B2B sales force (plans to 3x the team size) and expanding partner channels.
The third takeaway: When compared to Microsoft or Amazon, not only is Google the distant third in terms of market share (Google has less than 10% compared to that of Microsoft’s 20% and Amazon’s 33% of the US $130 billion market), it is not yet profitable (see Figure 7).
Note that Microsoft’s Intelligent business contains its core cloud unit (azure) but also the more traditional server products and consulting services that Amazon does not have, thus generating more cash flow.
In this post, we mentioned that Amazon made US $21.4 billion in Net Income from ads. How does that compare to other ad giants? See Figure 8.
Amazon’s ads business has grown quite large. In 2020, it made over US $21.4 billion, behind only Facebook’s US $84.1 billion and Google’s US $168.6 billion. Despite its relatively large size, it’s still growing pretty fast, at 46% CAGR for the past two years, the same growth rate as the much smaller SNAP, which is 9X smaller.
Unfortunately, we do not know the profitability of Amazon’s ads business, as the earnings report does not disclose this. But let’s imagine what it takes for Amazon to create the advertising business:
- It already has a website that amasses a lot of visitors that has high intent to shop.
- It has a ready made inventory of businesses that are willing to spend on advertising.
- To generate the ads system, it probably has to create some self-serve tools for advertisers to deploy ads and an auction/bidding system.
Thus, Amazon already has a lot of the ingredients to serve ads on its website. As such, Amazon’s ads business probably has a pretty healthy operating margin. The margin is probably higher than Facebook’s 38% since Amazon does not have to spend on content moderation or any infrastructure. It is probably much closer to Google’s operating margin, which is about 65 – 70% if you exclude the traffic acquisition cost (which is the money Google pays to generate traffic to its search engine) and R&D.
It is very likely that advertisement will be the next growth driver for Amazon, after AWS.
This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.
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