If you are a regular Amazon user you may have noticed the ads that have started to show up at the top of every search you do on the company’s web page. Or maybe you haven’t. They don’t look much different than organic search results. As the FT reports, advertising is becoming a big business for Amazon. In the last quarter the company generated close to $2 billion from advertising.
Advertising is a huge potential market for Amazon, and one where margins are orders of magnitude higher than on the pure sale of retail products.
Amazon is of course well within its right to offer up ads on its own website and they aren’t doing anything a brick and mortar store wouldn’t do with their own vendors (think end-caps for example), but something doesn’t feel right about the ads. It is hard to explain what. Maybe it is just the newness.
Hopefully it is just the newness, because as an investor in branded consumer goods products, advertising on Amazon and sites like it offers a significant opportunity for consumer businesses to rebuild the brand dominance that has been dented by shifting reading and television viewing habits.
In advertising, Amazon is pursuing another business with attractive margins and growth potential, analysts say, though so far it has only offered flashes of its potential.
The company’s “other” revenue — mostly derived from advertising — more than doubled to $2bn in the first quarter, and Brian Olsavsky, Amazon’s chief financial officer, told investors advertising was “a strong contributor to profitability”. The company makes money from ads that pop up when users are searching for items on the Amazon website, but is also starting to use all the information it has on consumers to sell ads that appear on other websites, too. Analysts expect that, over time, Amazon will become be a formidable competitor to Google and Facebook in the digital ad market.
By combining what it knows about Prime subscribers with data from Alexa-powered devices and Whole Foods visits, “there is a massive opportunity to really have a 360-degree view of a Prime member and with that comes advertising,” said Mr Ives of GBH Insights. “This is an opportunity that over the next four to five years is really in the tens of billions of dollars.”
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Jeremy Jones, CFA
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