Amazon appears to be learning a big lesson from its nascent, $500 million advertising business: It's a lot easier to make money if you're not selling physical stuff.
Reuters examined Amazon's profitability outlook and found that the company's real growth is not going to come from selling books and toys.
Rather, it's coming from:
• third-party merchandising (i.e. allowing other people to advertise their stuff on Amazon);
• non-physical digital media (e-books and movies);
• and computer cloud services for businesses.
An analyst told Reuters:
"Over the long term it does help margins," said Ben Schachter, an analyst at Macquarie. "You don't have to put these things on a truck and ship them."
Amazon's physical warehouses are legendary: vast, football field-sized storage units jammed with towers of boxes and fleets of palette trucks. That's expensive to maintain.
This explains why Amazon is so keen to develop its own TV programming business, which we noted CEO Jeff Bezos talked up yesterday in his Q1 2013 earnings statement. The shows are streamed digitally — Amazon doesn't need to ship DVDs to customers.
In fact, for the first time ever, Amazon's 10 best-selling items are either digital or non-physical products. CFO Tom Szkutak said on the conference call:
Another way you see it is, if you take a look at our top 10 best-selling items worldwide in Q1. The top 10 are all either digital or Kindle related. Paperweight is our best selling product worldwide. But again, all 10 spots in the Q1 were either Kindle or digital items. And I believe that that's the first time that we’ve seen.
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.
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