And compared to the rest of Amazon’s business, aside from Amazon Web Services, the business of choice for investors, advertising is a star. After all, online sales fell 4% in the quarter. Also, given the high-profit nature of advertising, the company is now likely to be a key contributor to the company’s bottom line. AWS operating profits of $ 5.7 billion offset the $ 2.4 billion losses in the rest of Amazon. But without the ads, the rest of Amazon would have lost a lot more money.
That said, it’s important to recognize that a lot is not known about Amazon’s advertising business, which makes it difficult to gauge its growth prospects and actual profitability. Investors deserve more clarity on this.
For example, how much of the $ 8.7 billion in advertising in the second quarter was driven by merchants who sell their products on the Amazon marketplace and want to secure a high ranking? It is not clear that these traders do this willingly or happily. A 2020 Congressional report on competition in digital markets 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 the Amazon marketplace are required to purchase advertising.)
A potential concern for investors, then, is that any kind of regulatory action against such practices could squeeze Amazon’s ad revenue. Another related point: Search results on Amazon have become so crowded with ads that the company risks alienating shoppers in search of actual results.
Even so, there is no doubt that Amazon is a growing successful advertising platform. People in the advertising industry say Amazon is seen as an effective place for brands to buy ads. Its wealth of data on what consumers are buying means that advertisers can target their ads to exactly the customers they’re trying to reach. Other retailers are building similar advertising businesses, with some success. In fact, GroupM, the world’s largest media buyer, says its largest packaged product customers have increased their spending on what they call “retail media” – Amazon and the Walmart Inc. and Target Corp. websites. – 12% of their total U.S. advertising spent in 2021 from 3% in 2019.
Additionally, Amazon not only sells ads on its marketplace, but other properties as well, such as its Freevee video streaming service and its Twitch gaming site. And it sells ads on websites it doesn’t own on the Internet, just like Google does. Unlike Google, however, Amazon doesn’t give any details on how much of the revenue comes from which bucket.
This is important for understanding revenue profitability and even how much revenue Amazon actually holds. When Google or Amazon sells ads on properties they don’t own, they only get a reduction in revenue. Google reveals what it shares with those other properties. It’s unclear from Amazon’s revelations what exactly it’s reporting: net or gross ad revenue. One more thing: Selling ads on Freevee may not be as profitable as selling ads on Amazon’s marketplace, given the cost of manufacturing or scheduling the license for the service. So how much ad revenue is Freevee contributing to the total?
It’s time to stop talking about the digital ad market as the one dominated by two companies, Alphabet Inc. and Meta. According to Insider Intelligence estimates, Amazon’s share of the digital ad market in the United States is expected to reach 12.6% this year, up from 7.7% in 2019. Meta and Google, which in 2019 held a share of combined market of 55.2%, this year will take 50.5%. And given that Meta’s ad revenue is likely to decline over the next 12 months, Amazon’s share looks set to grow during this recession. As encouraging as it may be for investors, however, it is time for Amazon to provide clearer information on the nature of its advertising business.
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Martin Peers is a Bloomberg Opinion columnist who focuses on technology and media. Previously, he was deputy editor of the Wall Street Journal’s Heard on the Street column and chief editor of Information.
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