Originally posted here https://www.wsj.com/articles/how-amazons-ad-business-could-threaten-google-and-facebook-1517157327
It’s easy to see how Amazon.com Inc. threatens the world’s retailers. But analysts, brands and advertising agencies are waking up to the fact that a growing piece of Amazon’s business impinges on turf now controlled by two other tech titans, Google and Facebook.
Amazon’s decade-old advertising business hasn’t generated much revenue or notice until recently. One sign of the turning point was last June, at the annual meeting of advertising giant WPP PLC. Calling the retailer “highly disruptive in many ways,” WPP Chief Executive Martin Sorrell projected the firm would spend $200 million placing ads with Amazon in 2017.
Amazon doesn’t break out advertising as a separate business, but according to a new report by J.P. Morgan analyst Doug Anmuth, the company racked up an estimated $2.8 billion in 2017 ad revenue. That’s small compared with his estimate for Google’s ad revenue in 2017: $73 billion. Yet in 2019, he expects Amazon’s revenue to more than double to $6.6 billion.
Amazon’s advertising success is directly related to its retail business. Consumer packaged-goods companies now spend more on digital advertising than all varieties of nondigital advertising combined, according to Cadent Consulting Group. Google’s search ad business leans on the premise that a customer researching a purchase will click relevant ads that will lead to a sale. Google has incredibly rich data from our search and browsing histories, and Facebook lets advertisers combine our social graph with other data, like where we’ve been and what we’ve bought.
But Amazon has a huge set of data that Facebook and Google can’t access—namely, its own. Already, more than half of all online searches for products start on Amazon, and of those a majority end there, according to various surveys. That figure has grown every year that pollsters have tracked it.
What happens when and if Amazon is not only the biggest online retailer in the U.S., but also one of the biggest physical retailers, with total sales greater than those of Walmart and all the data and technical chops of a Facebook or Google?
How it works
Thousands of brands large and small, selling through Amazon’s Marketplace seller program, are now what drives Amazon’s rapid growth in ad revenue. Jijamas, founded in 2013, wouldn’t exist without Amazon, says Gustavo Sanchez, the brand’s co-founder and chief executive. Jijamas sells one thing: Supersoft, high-end women’s pajamas.
Starting at about $70 a set, they rarely turn up near the top of search results for “pajamas” on Amazon, says Mr. Sanchez, since the site’s algorithm favors cheaper, higher-volume goods. Even its high customer ratings only help Jijamas get so far.
The company’s revenue growth is dependent on Amazon advertising, Mr. Sanchez says.
Advertising on Amazon is much like advertising on Google’s AdWords platform, says Daniel Knijnik, chief executive of Quartile, a small ad agency started last August that focuses solely on Amazon. Most ads appear atop search results for various keywords.
Advertising plays an important role in Amazon’s lucrative direct-to-consumer marketplace, where Amazon, at added cost, provides warehousing and shipping to third-party sellers. Because advertising allows brands to connect better with Amazon’s shoppers, Mr. Knijnik says, even manufacturers who previously sold wholesale to Amazon are now opening their own “stores” on the site.
For sellers like Mr. Sanchez, advertising on Amazon is a mixed bag. A “sponsored” listing is essential for getting products to the top of search results, which is the only surefire way to sell anything on a site that offers millions of different products. But sponsored lists are also another way Amazon skims off his profits.
On top of the 15% of an item’s selling price that Mr.Sanchez pays just to list Jijamas on Amazon’s marketplace, and the 5% to 6% he pays to have Amazon warehouse and ship his products, there is now up to 12% going to advertising for every item sold through an ad. This April, Amazon will start charging an additional 2% to list apparel (it hasn’t disclosed why). The net result is that Amazon will take about 35% of the price of each pair of Jijamas sold through its sponsored listings.
If Amazon decides to change its search result ranking algorithms or hike its ad fees, “there’s nothing I can do about it,” Mr. Sanchez says. Amazon represents 65% of his total sales, he adds; the remainder comes from his own website.
Where it can grow
Amazon is continually building and buying new sources of data on our tastes and consumer behavior, from its acquisition of Whole Foods and the build-out of its cashierless Amazon Go stores to the invasion of its low-cost, voice-powered speakers and the rapid increase in its library of streaming video.“Amazon doesn’t just know what you buy, they also know about how you shop,” says Diana Gordon, director of Shop+, the ecommerce-focused arm of WPP-owned ad firm Mindshare. “They know your browsing behavior, the cadence with which you restock certain types of consumables,” she adds.
Amazon is building out not only its self-service ad business but also the sales team devoted to getting brands on board.
All of this could give Amazon an edge over Google and Facebook, but for it to scale that business, it will have to look beyond ads targeted at consumers who are already shopping on its sites.
For that, Amazon has a web-spanning advertising network just like Google’s and Facebook’s—which is the reason a vacuum cleaner you once almost bought can haunt you for weeks on random websites. The Amazon Advertising Platform lets advertisers manage ad buys across multiple advertising exchanges, and it has quietly become as familiar to marketers as its equivalent from Google-owned DoubleClick.
Amazon also needs to expand the number of places it can sell advertisements, which is one reason the company bought videogame-streaming behemoth Twitch and is investing so heavily in its own streaming-video offerings.
The company has been creative about where it places ads—ever notice a movie ad on the side of an Amazon box shipped to your house? Perhaps, in the future, there could be an audio ad exchange for podcasts and skills delivered through Alexa. Maybe, some day, delivery drones will just shout the latest deals to a terrified populace?