Amazon is quickly gathering momentum in a new, highly profitable arena: online advertising, where it is rapidly emerging as a major competitor to Google and Facebook.
Amazon gets the bulk of its annual revenue (estimated to be $235 billion this year) from its e-commerce business, selling everything from books to lawn furniture. Its cloud computing business, Amazon Web Services, also accounts for around 11% of its revenue but more than 50% of its operating income.
But in its latest quarterly results, it was a category labeled “Other” that caught the attention of many analysts. It mostly consists of revenue from selling banner, display and keyword search-driven ads known as “sponsored products.” That category surged by about 130% to $2.2 billion in Q1, compared with the same period in 2017.
Those numbers are tiny compared to Google and Facebook, which make up more than 50% of the $88B digital ad market. But they come with major implications for those two giants.
Much of online advertising relies on imprecise algorithms that govern where marketing messages appear, and what impact they have on actual sales. Here, Amazon has a big advantage over its competitors. Thanks to its wealth of data and analytics on consumer shopping habits, it can put ads in front of people when they are more likely to be hunting for specific products and to welcome them as suggestions rather than see them as intrusions.
Other traditional digital platforms do not have the level of purchase data that Amazon has on companies' customers. Thanks to the vast amount of data Amazon collects, it can target ads not only to basic demographics — say, women over the age of 35 — but to a more precise segment of customers who are likely to be shopping for cellphones or barbecue grills.
AMZN's stock has rallied on the back of its continued advertising revenue growth. We don't see this trend slowly anytime soon. Amazon is now focusing more on advertising, rapidly hiring and building out its capabilities in a business with high profit margins for Google and Facebook.
As its flywheel continues to spin, Amazon should continue to capture a greater share of digital ad spend in coming years.