Amazon (AMZN 1.02%) is much more than a retail company. Two of its fastest-growing businesses are its cloud computing service, Amazon Web Services (AWS), and its burgeoning digital advertising business. Both are bringing in billions of relatively high-margin revenue for the online retail giant, and are key to the company's overall profitability.
But Amazon's competitors aren't willing to use its services like AWS or Amazon Advertising so long as they're attached to the enemy mothership. Shopify is the latest company to leave Amazon's cloud, opting instead for service from Google, the Alphabet (GOOGL 2.47%) (GOOG 2.25%) subsidiary. Meanwhile, just 20% of retailers are advertising on Amazon's platform, according to a survey from Digiday.
Can Amazon win over retailers, or is Google ultimately going to benefit?
Image source: Getty Images.
Amazon is attached to the cloud
Amazon can't do much about other retail companies not wanting to host their data on Amazon's servers. Many have wondered whether it makes sense for Amazon to spin off AWS. There are too many mutual benefits for that to be a value-creating proposition, CFO Brian Olsavsky pointed out, even when accounting for the retail companies that AWS is missing out on.
AWS continues to grow quickly, with sales up 43% year over year in 2017 to $17.5 billion.
Google's cloud business is starting to catch up, but still has a long way to go. Alphabet CFO Ruth Porat said Google Cloud reached a $1 billion per quarter run rate at the end of last year, and she believes it's "the fastest-growing, major, public cloud provider in the world." Porat wouldn't give details on exactly how quickly it's growing, and, of course, it's growing off a much smaller base than Amazon.
Amazon seems fine to cede retail businesses to Google and other competitors as it continues to grab share from other industries -- even ones it's competing in or thinking of competing in, including streaming video and healthcare, for example. That leaves room for Google (or someone else) to develop specialized solutions for retailers in order to attract more customers.
That said, you'd think the company best-suited to serve retailers is the one serving the biggest online retailer in the world.
Image source: Amazon.
Some retailers might not have a choice but to work with Amazon Advertising
Amazon's advertising solutions are still fairly bare bones. The most common use for Amazon's ad products are search ads, which populate sponsored search results at the top of listings just like Google's search ads. Amazon also sells banners that can show up above search results featuring an entire line of products.
It doesn't make sense to buy those ads if you don't sell on Amazon's marketplace. Google can drive internet searchers straight to your own website.
But smaller retailers may need to start considering Amazon as more of a marketplace than a stand-alone retailer. More than 50% of units sold on Amazon already come from third-party retailers.
As more and more product searches start on Amazon.com and not Google, Amazon should be able to attract more third-party merchants and eventually small specialty retailers could list their inventory on Amazon.com. Many retailers already work with online marketplaces like eBay, so it's not a significant leap.
With more third-party sellers on Amazon, more will buy advertising to stand out. Indeed, 27% of retailers told Digiday they plan to advertise on Amazon this year.
While retailers might prefer to advertise on Google and drive traffic to their own websites, they might give in and see the mutual benefits of giving Amazon some of their business.
Retailers need to go online
As more and more customers do their shopping online, retailers have growing needs for a cloud solution and a way to drive traffic to their products. Google's ability to drive traffic to their products is diminishing over time as shoppers tend to gravitate toward Amazon to begin their online product searches. That's why Amazon Advertising could cut into Google's market share.
Meanwhile, Google Cloud serves as an excellent alternative to AWS for retailers that don't want to support Amazon's operations, and that should enable Google to keep up its rapid growth. But there's plenty of industry growth to go around, and Amazon continues to dominate cloud computing growth on an absolute basis despite being shunned by other retail companies.
