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Building a big ad business will help the firm to keep expanding
AN AWARD-WINNING series, The Marvellous Mrs Maisel , follows the fortunes of a
woman in the 1950s who undergoes an unlikely transformation from a typical
housewife of the day into a talented standup comedian. It is produced by Amazon
and can be viewed on Prime Video, the e-commerce giant s on-demand service.
Since its birth in 1994, Amazon has starred in several dramatic metamorphoses
of its own. It has pushed beyond retailing into fields as varied as electronic
books, private-label goods and cloud computing, as well as online video. Now it
is intent on becoming a force in digital advertising.
Amazon has a long way to go before it catches up with the giants of the
industry. It has 4% of an American market worth $111bn, compared with Google s
37% and Facebook s 21% (see chart). But Amazon started experimenting with ads
only six years ago, and its young business is growing fast in a rapidly
expanding market. By the end of the year it will overtake Microsoft, a software
giant, and Verizon, a big telecoms firm, to rank third in America, according to
eMarketer, a research firm.
Despite trailing far behind the leaders, Amazon s ads are having an outsize
effect on the company itself. Its revenues from ad sales worldwide in 2018
could hit $8bn, contributing perhaps $3bn in operating profit over a quarter of
the total. Michael Olson of Piper Jaffray, a brokerage, says that by 2021, it
is highly likely that profits from Amazon s ad business will exceed those
from its lucrative cloud-computing unit, Amazon Web Services. Amazon loses
money on its core e-commerce business, but can use the fat profits from
advertising in the same way as it has used the cash from cloud computing to
push into new businesses and countries, says Brian Nowak of Morgan Stanley, an
investment bank.
Closing the gap between Facebook and Google will be difficult but not
impossible. Like those two, Amazon has a rich pool of data about users which it
can use to aim its ads, including information about past purchases, which
product reviews consumers have read, where they are and their online browsing
behaviour. Amazon has a unique advantage, because consumers who are using the
site usually intend to buy things right away. Some 56% of Americans start the
search for any product on Amazon.
That will help it to grow as brands shift marketing dollars away from physical
retailers. Trade spending payments to retailers by makers of soap, mouthwash,
canned food and other household basics for prime shelf space and promotional
offers adds up to around $200bn in America alone. Amazon is especially
attractive to makers of such consumer packaged goods. Brand loyalty is weak and
buyers are more likely to be swayed by prominent ads.
Amazon s ads will not appeal to all businesses. Firms that do not sell goods
through the site, such as fashion brands, carmakers and travel companies, will
not advertise there. But online video is one potential opportunity to attract
more business. Amazon allows video ads on Twitch, its online-gaming site, but
it could also put adverts onto Amazon Prime to win some of the advertising
spending aimed at conventional television channels.
Allowing advertising on Alexa, its voice-assistant, and Echo, its smart
speakers, is another possibility. In the future, when people ask questions of
Alexa or order something by voice, Amazon could incorporate advertising.
Earlier this year it was reported that Amazon was in discussions with Procter &
Gamble and Clorox about voice ads for their wares.
As it chases growth, Amazon will face three obstacles. First, it must consider
whether its advertising will put off customers. Voice ads butting in to
conversations, even ones with inanimate objects such as smart speakers, are
potentially irritating. And subscribers who have paid to watch online videos
are unlikely to enjoy sitting through commercial breaks. Amazon must take care
to avoid alienating the people it spends so much trying to please.
Second, Amazon will have to balance its relationship with vendors and address
potential conflicts of interest. Advertisers can buy space at the top of
product searches or pay to sponsor products. In addition, some search results
are labelled Amazon s choice , which favour important vendors and advertisers,
says Matti Littunen of Enders Analysis, a research firm. (Amazon does not
disclose how products get this designation.) And as Amazon becomes a
manufacturer and seller of more of its own private-label items, it will have to
decide how much prominence to give paying advertisers and how much to its own
goods.
According to research by RBC Capital, an investment bank, of 100 product
searches on Amazon s app, in only three instances was the top ranking result
not a sponsored ad. Those were for three Amazon devices: two smart speakers and
a Kindle e-reader. Makers of competing products will be unhappy if it appears
that Amazon is favouring its own products on its site or discouraging
competition by driving up the cost of ad space on products that directly
challenge its private-label goods.
Amazon will also have to contend with a more active regulatory environment. In
September the European Commission announced a probe into its use of data and
whether it could use information about third-party retailers on its site, which
are also competitors, to boost its profits. As the inquiry progresses,
advertising practices could become an area of interest.
Amazon has so far avoided a privacy backlash from customers. Facebook uses
your personal life and friend graph to target ads. Amazon has a more clearly
commercial relationship with users, says Jonathan Nelson, the head of digital
at Omnicom, a large advertising agency. But as its ad business grows, so will
scrutiny. Amazon gives users little control over how much information they
share for advertising purposes, which could violate new data-collection and
privacy rules in Europe, says Mr Littunen.
As it gathers more information about people in the physical world, including
their spending habits at Whole Foods, the grocer it bought last year for
$13.7bn, its dossier of data on consumers will become larger and more personal.
That will propel Amazon s rise. Just as Mrs Maisel discovers she has a new
talent for cracking jokes, Amazon has a chance to thrive in a new venture.
Before long it could make the digital-ad duopoly a three-way affair.
This article appeared in the Business section of the print edition under the
headline "Amazon s ad-renaline rush"