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Is Advertising Amazon's Next Big Growth Product?

By Adam Levy - Feb 7, 2017 at 1:29PM

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It's one of the few companies with targeting data that could challenge Google and Facebook.

In digital advertising there are Facebook (META -5.20%) and Google, and then there's everyone else. But one company is starting to emerge as a potential contender to the two ad behemoths: Amazon.com (AMZN -5.14%) is starting to spread its wings as an advertiser.

Amazon certainly has the user data to compete with Facebook or the big Alphabet (GOOG -3.47%) (GOOGL -3.30%) subsidiary. Although it has only 300 million active customers as of its last update, the shopping data it has on those users is invaluable. In fact, Amazon may be able to target advertisements better than Facebook or Google despite their huge troves of user data. After all, nothing speaks louder than how people spend their money.

Amazon logo

Image source: Amazon.com.

What's this other revenue line item, and why's it growing so quickly?

During Amazon's fourth-quarter earnings call, UBS analyst Eric Sheridan asked about the "other" line item on Amazon's income statement. He pointed out that it's exhibited a lot of momentum over the past few years and wondered if that was due to growth in advertising.

The other category includes "certain advertising services and our co-branded credit card agreements," according to Amazon's quarterly report. While Amazon did just revamp its credit card offering, it's been around in some form in the U.S. since 2002 and in Canada since 2012. The vast majority of growth in the category is probably coming from advertising.

And it's been growing. Last year, other revenue in North America increased 60%. That accelerated to 81% growth in the fourth quarter. That makes it Amazon's fastest growing source of revenue, growing even faster than its cloud-computing service, Amazon Web Services.

Granted, the other revenue Amazon brings in accounted for just 1.7% of its total North American sales -- $1.3 billion. So it's still working on a very small revenue base.

Expanding its ad products

Most of the ads Amazon sells are on its own websites. Search results on Amazon have an increasing number of sponsored products, with which third-party merchants pay to show up at the top of the page, not unlike Google's search advertising. Management described sponsored products as "off to a great start," indicating they see a lot of room for expansion.

A report from BloomReach last fall found that 55% of online shoppers begin their product search on Amazon.com. As more and more people search Amazon for products, the more ads it can show. In fact, sponsored products could start stealing ad budgets away from Google, which is why Eric Schmidt said it's Google's biggest competitor in 2014.

But Amazon's advertising is starting to extend beyond its own websites, wading deep into Google's territory. Last year it developed a header-bidding solution. Header bidding allows publishers to take more offers for their ad inventory instead of wading through each offer one by one and taking the first decent one they find. (This is all done extremely quickly by computer algorithms.)

Amazon's advantage in the space is that it can perform the complex algorithmic ad bidding process in its AWS servers, enabling publishers' websites to load faster than other header-bidding systems allow. Google has historically dominated the space that header bidding threatens.

As mentioned, Amazon is one of the few companies with user data that can compete with the targeting capabilities of Facebook or Google. So if it continues to build out its advertising products on third-party websites, it could start to take a significant share of revenue from Google and Facebook. Google generated $15.6 billion in revenue from its network members' websites last year. Facebook's Audience Network reached a $1 billion run rate in the fourth quarter last year, but the company hasn't provided any updates since then.

The digital ad market is huge. Advertisers spent $195 billion worldwide on online ads last year, according to eMarketer. That number is expected to grow to $335 billion by 2020. If Amazon can grab just a slice of the market producing high-margin revenue, it could provide a significant boost to its bottom line. 

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$107.40 (-5.14%) $-5.82
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,240.15 (-3.30%) $-76.52
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$160.68 (-5.20%) $-8.81
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,251.43 (-3.47%) $-81.02

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