How Amazon Is Competing With Google -- and Maybe Even Winning

No business wants to hear that Amazon.com (AMZN -2.44%) is taking an interest in their slice of the market -- the e-commerce giant is known for looking into unexpected avenues and sometimes proceeding to completely dominate them.

In this segment from Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Evan Niu talk about Amazon's "other revenues" segment and how its breaking into advertising, groceries, and more is making so many parts of the market nervous.

A full transcript follows the video.

This video was recorded on Nov. 3, 2017.

Dylan Lewis: One of those little side investments, less of something that's a long time built out and more of them experimenting within their platform, is their advertising business. This is something that is very tiny in the grand scale of Amazon's total business, but I think worth touching on. The Other Revenues segment for them was up 58% year-over-year, and that segment is where Amazon puts its advertising revenue. Management had actually noted that ad revenue had outpaced revenue for the whole segments. So, it's growing very quickly. That's a nice business that's doing pretty well for them, and I think could become increasingly important down the road.

Evan Niu: Yeah. I recall this quote from Google's (GOOG -2.17%) (GOOGL -1.88%) chairman, Eric Schmidt, a couple of years back. I forget where he was. Someone asked him, who do you see as Google's biggest competitor? And most average people would say Apple, because Android vs. iOS. But Schmidt's argument back then a couple of years ago was, Amazon is actually Google's biggest competitor. And his reasoning was, a lot of the time, when people go to Google and plug something into the search box, you're looking to buy something. Of course, Google serves us ads that are very targeted, very relevant, and knows exactly what you want. But the point is, a lot of times, you go there when you're looking to buy something. But if you already know that that thing is going to be on Amazon, you don't go to Google at all, you just go straight to Amazon's website, search on their website for what you're looking to buy. And when you have that purchase intent, it's a really hugely valuable thing in online advertising. So, to the extent that Amazon continues to grow, and you can find literally anything on there, and that does have the potential to take away some of those traffic and engagement away from Google's core search engine and ad business, because everyone is going to go straight to Amazon and search for what they want there. More recently, eMarketer last week estimated that Amazon's ad revenue should be about $1.6 [billion]-1.7 billion this year, which would make it the fifth largest in the U.S. Of course, still nowhere near Facebook or Google in terms of the size of the advertising business. But like you mentioned, it's growing, it's becoming more important. That would be more than Twitter or Snapchat, which is kind of a crazy data point.

Lewis: I think that's good context there, because the Other Revenue segment itself for the quarter was about $1.1 billion. So, you think about the scale that everything else is operating on for Amazon, and yes, this is high growth for them, and it's a super high margin business to be in. So, it's nice that they're getting something there. But it's still pretty small in the grand scheme of things. Still worth pointing out, though. One other thing I wanted to touch on with Amazon was the fact that, this is the first quarter that we have Amazon reporting Whole Foods numbers on their books. Moving forward, you'll see Whole Foods operations being tucked into Amazon's Physical Store segment, which generated $1.3 billion in revenue for the quarter. So, if you're looking for how that's doing, that's where it's going to be. I personally think it's kind of interesting that they are classifying it as Physical Stores. It might speak to the company's ambitions a little more broadly.

Niu: Yeah, I definitely agree with you there. I think the fact that they're disclosing physical retail sales now is potentially meaningful, because it could be indicative of where they want to go in the future. If they're starting to break this out, and right now, it's all Whole Foods, but if they're starting to break this out now, it really does underscore this idea that Whole Foods is really a starting point for their ambitions for physical retail. They have so many other things they can do beyond local on-demand grocery delivery. There's now talk about them getting into the prescription drug business, pharmacy business. They wouldn't talk about it, which further stoked speculation. But there's so many things they can do which is, of course, ironic, because they've helped put a lot of physical retailers out of business. I do think they're going to add a lot more up to their sleeve in the future.