Alphabet's (GOOG +1.35%) (GOOGL +1.63%) Google and Amazon (AMZN +3.47%) respectively dominate the online advertising and e-commerce markets across many countries. There are usually clearly defined barriers between the two companies' ecosystems: Google repeatedly tried to enter the e-commerce market, but it hasn't made meaningful progress against Amazon. Amazon owns a fledgling advertising business, but it's still dwarfed by Google's.
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However, recent estimates indicate that Amazon's advertising business is growing at a much faster rate than Google's, and that it could become a pillar of growth for the company over the next few years. Therefore, investors should understand what Amazon's advertising business does and how fast it's actually growing.
Understanding Amazon's advertising business
Amazon's advertising business is split into three units: Amazon Media Group (AMG), Amazon Marketing Services (AMS) and Amazon Advertising Platform (AAP).
AMG is the team that sells Amazon's ad products and works with companies to optimize the display of those ads across Amazon properties -- including its namesake marketplace, IMDb.com, DPReview.com, and Kindle devices. AMG's A9 ad network also bids against rivals like Google for ad inventories.
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AMS is a pay-per-click performance marketing suite that offers vendors sponsored products, headline search ads, and product display ads. The platform also offers "Amazon Stores", which can be customized via templates and brand-specific URLs.
AMS ads are only displayed for products sold on Amazon, and the ads only appear on Amazon sites. Unlike Google's AdWords, which are determined by an advertiser's optimization choices, AMS' ad rankings are determined by a product's popularity and overall sales.
AAP is an enabled permission within the AMS suite which serves programmatic ads. Advertisers that use this service can either work with an Amazon account team to plan their marketing campaigns, or use the self-serve advertising platform which the company introduced in 2014.
How big is Amazon's advertising business?
In mid-January, JP Morgan claimed that Amazon generated $2.8 billion in ad revenues in fiscal 2017, and that figure could rise a whopping 61% to $4.5 billion in 2018. That figure would account for about 2% of Amazon's estimated revenues for 2018.
That's not a significant percentage, but JP Morgan expects Amazon's ad revenues to hit $6.6 billion by 2019. JP Morgan believes that growth will be supported by the expansion of Amazon's Prime ecosystem, the introduction of new digital ad tools, and its rising popularity among major advertisers.
By comparison, Wall Street expects Alphabet, which generates nearly 90% of its revenues from Google's ad business, to grow its annual revenue 22% to $110 billion for fiscal 2017 when it reports its fourth quarter and full-year earnings on Feb. 1.
Amazon's advertising business isn't in the same league as Google's yet, but a lot of advertisers have taken note. Advertising giant WPP (WPP 0.62%), which spent about $5 billion on Google ads last year, plans to boost its ad spending on Amazon from about $200 million in 2017 to roughly $300 million this year. In an interview on CNBC, WPP CEO Martin Sorrell stated that decision was based on the fact that "55% of product searches in the US emanate from Amazon" instead of Google.
Will AMS become the next AWS?
Today, Amazon's biggest profit driver is AWS (Amazon Web Services), the largest cloud infrastructure platform in the world. Like AMS, AWS started out as a small side business for Amazon, but gradually evolved into a major pillar of growth for the company.
AMS' online ad revenues also likely have high margins like AWS' cloud services. AMS still doesn't generate enough revenues or operating income to move the needle for Amazon yet, but its gradual growth could turn it into a third pillar of growth alongside its core marketplace and AWS businesses.
