It seems silly to point out to people that there was a time not all that long ago when Amazon (NASDAQ: AMZN) only sold books. Those days are long gone, and now, of course, the online retailer sells pretty much everything.
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In recent years, though, Amazon has moved well beyond just selling stuff, becoming a huge provider of cloud hosting through its Amazon Web Services (AWS) business. It's also a major maker of devices, with the various Echo and Fire TV models joining the Kindle e-reader and tablet lines. The company has also become an increasingly large player in the original content creation market as its Prime Video service has begun competing with major networks andNetflix for high-profile projects.
Amazon has been more than an online retailer for many years, but its non-store businesses have become even more important in the past year. In many cases, the growth has been astounding, while in others, it's a case of the company continuing to be willing to invest in projects where the payout will not be immediate.
Amazon's Echo has been an area of investment for the company. Image source: Amazon.
AWS has become a monster
Amazon's cloud hosting web services business grew by 55% year over year in Q3 to $3.23 billion. That, according to the company, broke down to $861 million in operating income and $2.21 billion in expenses.
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In the third quarter, AWS produced about 10% of the company's total revenue, but nearly all of its operating income, according to a post-earnings analysis by Motley Fool's Anders Bylund, who noted that "the division's $861 million operating profit was more than three times larger than the North American retailing profits, and the international retail segment reported another operating loss."
In the past year, AWS crossed an annual run rate of $10 billion, and its growth shows no sign of slowing down. Were it its own company, Amazon's web services business would land in the middle of the Fortune 500, a global list that ranks companies by total revenues during their fiscal years. Despite that, Amazon has said repeatedly that is has no plans to spin off AWS as its own company.
Amazon is making continued investments
During the company's Q3 earnings call, CFO Brian T. Olsavsky made it clear that growing short-term profit margins was not a goal of the company. Instead, he said Amazon "will continue to invest in the business where we are seeing significant customer traction," and he explained what those areas are.
"First, video content and marketing associated with that is nearly doubling year over year in the second half of the year. And it continues to be a large increase both Q3 and Q4," he said in the call, which was transcribed by Seeking Alpha (registration required). "In Q3 we added 18 fulfillment centers and we've added five more in October. For the year we'll add 26."
That's a big step up in investment, marking the first time the company has had a double-digit increase in fulfillment centers since 2012. Overall, the idea of investing in the future is not a change for Amazon, but how it's spending its money -- specifically the investment in video content -- has been a change.
Amazon wants to control your home
In addition to investing heavily in original content and fulfillment centers, Olsavsky said during the earnings call that the company has committed "a lot of resources" to its Echo products, which use Amazon's Alexa voice assistant. The original Echo (which has since been joined by two smaller sister products) was released in the U.S. in June 2015, and it has become clear in the nearly 18 months since that relatively low-key launch that the company has big plans for the device.
When Echo first launched, it was basically a voice-controlled speaker, and Alexa could do a few tricks like deliver weather reports or tell a joke. Since the launch, though, Amazon has steadily added features and partners and has made Echo a viable home-control device. The company has also opened up its technology to outside developers, allowing them to grow the device's artificial intelligence capabilities.
Now what was once basically a fancy, voice-controlled music player can control your lights, thermostat, and basically any other part of your house. Echo has been expanding its capabilities, and consumers have noticed, with Amazon selling over 5 million of them as of September, according to research from Consumer Intelligence Research Partners (CIRP).
Those numbers likely spiked during the early part of the holiday season, when Amazon offered discounts on the base Echo as well as the smaller Dot and Tap models at discounts. In addition, CIRP found that Amazon customers' awareness of Amazon Echo increased to 69% as of September 30, 2016, up from 20% as of March 31, 2015.
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Daniel Kline has no position in any stocks mentioned. He owns an Echo and mostly uses it to play music. The Motley Fool owns shares of and recommends Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.