Why Amazon.com Is a Credible Threat to Google

Just when you think you're safe, that's when the competition swoops in and proves otherwise. This could be the fate awaiting Google (Nasdaq: GOOG  ) . An alarming 97% of the search giant's $37.9 billion in revenue last year came from advertising. Google relies on healthy ad sales to stay in business -- a livelihood that Amazon.com (Nasdaq: AMZN  ) could threaten.

Taking the lead 
As the undisputed e-commerce champ, Amazon makes money not only through sales on its website, but also by selling advertising space on its site. Next time you're on Amazon.com, check out the links on a product page listing. The advertisements you see are based on the product you searched for, similar to Google's ads. Customer relevance is critical to maximizing clicks on ads.    

Last year, some of Google's top advertisers included Progressive (NYSE: PGR  ) and eBay (Nasdaq: EBAY  ) . Progressive spent an estimated $43.1 million on Google AdWords for the year, while online auction site eBay dished out $42.8 million. By industry the top spot goes to finance and insurance, then retailers, followed by travel and tourism. Priceline.com (Nasdaq: PCLN  ) was one of the big spenders for the travel sector, spending $19.6 million last year for advertising with Google.

With Google generating billions from its AdWords program and targeted search ads, there's no need to argue the effectiveness of online advertising.

U.S. spending on online advertising is expected to reach $50 billion in 2015, according to eMarketer -- that's a market opportunity that Amazon doesn't plan to miss. In an effort to boost its ad sales, Amazon's actively growing the company's advertising management team. Amazon currently lists 24 open positions within its advertising department. 

Amazon, whose site gets around 100 million visitors each month, could be trouble for Google as more shoppers choose to make their initial search on Amazon.com.

For companies such as Procter & Gamble and Microsoft, highly targeted placement on Amazon.com means their ads reach tens of millions of Amazon shoppers. More importantly, Amazon makes money when a sponsored link is clicked, and according to some sources, those clicks could add up to more than $1 billion in annual ad revenue. As more consumers use Amazon to directly search for products, more merchants will move their advertising dollars there as well -- leaving Google to fend for itself.

While both Google and Amazon have presences in advertising (one much more than the other), they also are placing an increasing emphasis on the mobile space -- and for good reason. The way people compute is fundamentally shifting before our very eyes, and savvy investors are cashing in on this big-ticket trend. To let our readers know about a few lesser-known ways to play this trend, the Fool issued a research report about "3 Hidden Winners of the iPhone, iPad, and Android Revolution," which we made free to our readers. Access your free copy today.

Fool contributor Tamara Rutter owns shares of Amazon. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing news. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of priceline.com, eBay, Google, and Amazon.com and writing puts on eBay. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 08, 2012, at 3:45 PM, lbjack wrote:

    Your thesis is sound.

    When I shop online, the FIRST place I go is Amazon, because there's a good chance I can get it there, there's a good chance I can get it on Prime, and there's almost a certainty the pricing will be competitive.

    I think millions use Amazon as their default shopper. When they're on Amazon, they're already in a buying mode. I think their advertisers like that very much. (Not always so outside of Amazon, where Google ads become a bit of a nuisance if you're not shopping.)

  • Report this Comment On March 08, 2012, at 6:48 PM, TMFSocialME wrote:

    Agreed. I typically search Amazon.com before even thinking about shopping Google.com. It will be interesting to see how this plays out.

  • Report this Comment On March 09, 2012, at 3:33 PM, terradistas wrote:

    I beg to differ. While Amazon registers 100 million hits per month, Google has been known to register over 9 billion worldwide. Amazon.com is limited by the fact that people only go there to shop, while people use Google for a much wider variety of purposes. Unless Amazon enters into the online search industry sometime soon I don't think they'll hinder Google's ad revenue too greatly.

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