Daily Management Review

Amazon takes ad revenues away from Google


Facebook and Google are two clear leaders of online advertising, and there is a wide gap separating them from all others. However, these two have an unapparent but strong rival. This is Amazon, which is starting to play an increasingly prominent role in the advertising market.

Silus Grok
Silus Grok
Indeed, Amazon has enough information about users to compete with Facebook and Google. According to recent data, the online store has only 300 million active customers, but the company knows nearly everything about them and can target ads more precisely compared to its larger competitors. After all, the way we spend money says a lot about us.

During a conference dedicated to Amazon’s report for the IV quarter, UBS analyst Eric Sheridan asked about an entry called "Other". He noted that this section has shown a significant increase in the past few years, and wondered whether it’s about advertising. 

According to the report, this category includes "certain advertising services and co-branding agreements on credit cards". The company has just come up with an updated product, built around a credit card. Yet, a similar proposal has existed on the US market since 2002. Growth of this category can probably be explained by advertising.

In the last year, "Other" line has climbed 60% up, and the growth reached 81% in IV quarter. Thus, it is the fastest growing category, which overtook even cloud computing Amazon Web Services.

However, "Other" has yielded only 1.7% of total revenues in the United States.

Most of advertising sold by Amazon is located on the company's own websites. Amazon’s search results feature increasingly more promotional items as third-party vendors pay to show up on the top of the page. The company’s management describes the technology as a "beginning of a long journey" - the online retailer sees lot of opportunities for development here.

BloomReach report shows that 55% of online shoppers first go to amazon.com when they need to purchase something. More people means more ads to be displayed, and these promotional items are beginning to deprive Google of revenue. No wonder that Eric Schmidt in 2014 called Amazon the largest competitor of Google.

Moreover, advertising on Amazon is gradually going beyond the company's own sites, and thus it is encroaching further into Google’s territory. Last year, the company came up with a new invention – an automated auction for advertising space on the site.

The main advantage of Amazon’s auction lies in complex cloud-based, and the publisher’s site is loaded with a minimum of delay. Previously, Google has dominated this area, but now it can no longer feel safe.

Amazon is one of the few companies that have enough user data to compete with Facebook or Google. If the retailer continues spreading its advertising network to third-party websites, over time it may take away a significant proportion of revenues of current market leaders. Last year, Google earned $15.6 billion from relevant ads on partner sites, and Audience Network of Facebook earned $ 1 billion in the IV quarter last year.

Internet advertising market is huge. According to eMarketer, the world spent $ 195 billion on online advertising in the last year, and this figure is expected to amount to $ 335 billion by 2020. If Amazon seizes at least part of this highly profitable market, the company's profit will grow significantly.

source: fool.com

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