Three Things You Need to Know About Amazon's Advertising Business
By Tricia McKinnon
While Amazon is mainly known to the general public for its retail business it has many other lines of business. From publishing to music to healthcare it is hard to keep up with Amazon’s ever-expanding list of products and services. But it is advertising that holds the spot for the company’s highest margin and fastest growing business. While Amazon has been in the eCommerce business for 25 years it only started experimenting with advertising seven years ago and here are three things you need to know about this lucrative business segment.
Advertising has a disproportionately large impact on Amazon’s profitability. Amazon’s business unit that consists primarily of advertising revenue generated $2.5 billion in the third quarter of 2018. It is estimated that Amazon’s advertising profit margins could be as large as 75% and is one of the key drivers behind Amazon’s largest quarterly profit ever of $2.9 billion in Q3 of 2018. With growth slowing in its core retail business, sponsored products which include banner, display and keyword search-driven ads have become a great source of additional revenue and profits for Amazon.
Amazon has an advantage over Facebook and Google in advertising. Consumers are primed to shop while they are on Amazon. 46.7% of product searches start on Amazon vs. 34.6% that start on Google. Since nearly 50% of eCommerce sales take place on Amazon, Amazon has a wealth of actual customer shopping data. This data will allow marketers to target consumers by a set of variables that are not available from companies such as Facebook. For example Amazon can serve up an ad from a book publisher while a target consumer is likely in the process of shopping for books.
Additionally, consumers are less likely to see ads on Amazon as interruptions and may instead see them as a helpful part of the buying process. There is also a significant amount of upside for Amazon in this market segment as a study conducted by Catalyst found that only 15% of 250 marketers surveyed believed they were taking full advantage of advertising on Amazon. While Amazon was only estimated to have a 4.1% of share of digital advertising revenues by the end of 2018, coming in third after Google at 37.1% and Facebook at 20.6%, eMarketer estimates that Amazon’s share will jump to 7% by the end of 2020.
Amazon’s advertising sales extend beyond its core retail website. For example, TV networks and digital streaming providers have to provide Amazon with a 30% cut of digital ad revenues from ads that appear on Fire TV. Fire TV is Amazon’s connected TV platform and while publishers such as NBC, CBS, ABC, and Viacom previously kept all digital ad revenue generated on Fire TV they now need to provide a 30% cut to Amazon. According to eMarketer there were close to 50 million people with a Fire TV in 2018. Amazon appears to be following in market leader’s Roku’s footsteps. Roku generates more money from advertising sales than it does from hardware units. Ad sales on Amazon’s Fire TV platform could become a key driver of advertising growth for Amazon. The trend towards cord cutting will only amplify this opportunity.