Amazon’s advertising business is a star. But where are the details?
And relative to the rest of Amazon’s business — aside from Amazon Web Services, investors’ favorite business — advertising is a star. After all, online sales fell 4% in the quarter. Additionally, given the highly lucrative nature of advertising, the business is likely now a key contributor to the company’s bottom line. AWS operating profits of $5.7 billion offset losses of $2.4 billion from the rest of Amazon. But without advertising, the rest of Amazon would have lost a lot more money.
That said, it’s important to recognize that much is unknown about Amazon’s advertising business, making it difficult to gauge its growth prospects and true profitability. Investors deserve more clarity on this.
For example, how much of the $8.7 billion in advertising in the second quarter was generated by merchants who sell their products on Amazon’s marketplace and want to ensure prominent placement? It is not clear that these merchants do this voluntarily or with pleasure. A 2020 congressional report on competition in digital marketplaces cited evidence that “Amazon may require sellers to purchase their advertising services as a condition of making sales on the platform.” (An Amazon spokesperson denied that merchants selling on Amazon’s marketplace are required to buy advertising.)
So one potential reason investors are concerned is that any regulatory action against such practices could reduce Amazon’s advertising revenue. Another related point: Search results on Amazon have become so cluttered with ads that the company risks alienating shoppers looking for real results.
Even so, there’s no doubt that Amazon is an increasingly successful advertising platform. People in the ad industry say Amazon is seen as an effective place for brands to buy ads. Its wealth of data on what consumers are looking for means advertisers can precisely target their ads to the customers they are trying to reach. Other retailers are creating similar ad ventures, with some success. Indeed, GroupM, the world’s largest media buyer, says its biggest packaged goods customers have increased spending on what it calls “retail media” – Amazon and Walmart Inc.’s websites and Target Corp. – 12% of their total advertising in the United States. expenditure in 2021 compared to 3% in 2019.
Additionally, Amazon not only sells ads on its marketplace, but on other properties, such as its video streaming service Freevee and on its gaming site Twitch. And it sells ads on websites it doesn’t own on the internet, just like Google does. Unlike Google, however, Amazon doesn’t provide details on what share of revenue comes from which bucket.
This is important for understanding revenue profitability – and even how much of the revenue Amazon actually keeps. When Google or Amazon sells ads on properties they don’t own, they only receive a portion of the revenue. Google discloses what it shares with these other properties. It’s unclear from Amazon’s disclosures what exactly it reports – net or gross ad revenue. Another thing: selling ads on Freevee can’t be as profitable as selling ads on Amazon’s marketplace, given the cost of producing or licensing programming for the service. So how much advertising revenue does Freevee contribute in total?
It’s time to stop talking about the digital advertising market being dominated by two companies, Alphabet Inc. and Meta. Amazon’s share of the U.S. digital advertising market is expected to grow to 12.6% this year, Insider Intelligence estimates, up from 7.7% in 2019. Meta and Google, which had a combined market share of 55.2% in 2019, will take 50.5% this year. %. And given that Meta’s ad revenue is expected to decline over the next 12 months, Amazon’s share looks likely to grow during this downturn. As encouraging as this may be for investors, it’s time for Amazon to provide clearer information about the nature of its advertising business.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Martin Peers is a Bloomberg Opinion columnist covering technology and media. Previously, he was associate editor of the Wall Street Journal’s Heard on the Street column and news editor.
More stories like this are available at bloomberg.com/opinion