Amazon (AMZN -2.99%) is taking over the retail industry, but that's not how it makes money.

Three-quarters of its operating income last year came from its cloud computing business, Amazon Web Services (AWS). Only a quarter came from retail sales.

Chart showing Amazon's operating income by division

Data source: 2016 10-K. Chart by author.

Cloud computing is huge nowadays. No longer do people, companies, and governments need to own and operate their own servers. Amazon will do it for them.

Amazon didn't start out, over two decades ago when it was founded, with the idea of being a cloud computing company. It developed the service to fulfill its own needs, realizing only later that it could sell those services to others.

It's a good business for Amazon not only because it brought in $12.2 billion in revenue last year (a number that's rapidly growing). It's also a good business because the profit margins are a mile wide.

For Amazon's retail unit to earn $1.1 billion in operating income, it had to generate $124 billion in sales last year. AWS earned about three times as much operating income from only $12.2 billion in sales. This is one reason Amazon can keep its retail prices so low, subsidized as they are by its cloud computing services.

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