Amazon's (AMZN 0.40%) advertising business surged in 2020 as it benefited from more shoppers buying online instead of in stores. Other revenue, which primarily consists of its ad business, increased more than 50% to $21.4 billion last year.

But growth isn't slowing down. Amazon grew its other revenue segment a whopping 77% year over year in the first quarter of 2021. The analysts at eMarketer expect the company's worldwide ad revenue to more than double from its 2020 levels by 2023.

Here's how Amazon gets there.

A truck with the Amazon Prime logo painted on the trailer.

Image source: Amazon.

The acceleration of two industry trends

The unique headwinds of the past year forced many businesses to adapt their operations. Two big changes were accelerations in the shift from in-store retail to digital fulfillment and the shift from television advertising to digital advertising. Amazon's ad business largely operates at the intersection of the two.

U.S. e-commerce sales grew 36.5% in the last three quarters of 2020, according to data from the Census Bureau. Many expect the e-commerce growth rate to remain elevated above pre-pandemic levels.

Meanwhile, TV ad spending dropped considerably in 2020 amid a dearth of live sports and new episodes of top series. The saving grace for TV ad spend may have been the U.S. presidential election. More people cut the cord in 2020 and that trend isn't slowing down in 2021. While ad spending should recover in 2021 and 2022, the overall downward trend continues as more marketers shift their budgets to digital.

Some analysts are skeptical that the digital ad sales growth from 2020 can continue into 2021 and beyond. Citi analyst Jason Bazinet recently downgraded Facebook (META -0.27%) and Alphabet (GOOG 0.83%) (GOOGL 0.72%) because he believes the market is overestimating the overall growth of digital advertising spend. He doesn't think Amazon is immune, either.

That said, since Amazon's ad strength stems from two trends, it's more likely to be able to sustain stronger growth than its competitors. In any case, Amazon ought to be able to take market share from the competition. Meanwhile, the two ad giants are working to get more people shopping through their products, as a means of protecting their core businesses from Amazon's growing strength in digital advertising.

How Amazon will double its ad sales

The vast majority of Amazon's ad business stems from search and display ads on its retail website. It's an area of digital advertising Amazon dominates. The company's ability to continue growing its share of online retail means it should continue to see outsize growth in the channel versus competitors.

Investors can expect e-commerce channel advertising to keep pace with Amazon's retail sales growth. In order to double in three years, Amazon would only need to grow an average of 26% per year. 

The company's forecast for the second quarter called for total sales growth between 24% and 30%, despite the very tough comparable period from a year ago when the pandemic ramped up. The average analyst on Wall Street expects Amazon's total sales to increase about 33% for the full year.

The other big source of ad revenue is Amazon's video advertising unit, which sells ads across its Fire TV devices, Twitch, and IMDb TV. Amazon will be able to benefit from the continued shift to streaming content, as well as the outsize growth of ad-supported video-on-demand as consumers look to supplement their subscription services.

Connected-TV ad sales are expected to double from 2020 to 2023, so Amazon merely has to keep pace with the industry. Amazon may be able to exercise leverage over media companies for distribution on Fire TV over the next few years, in order to take a greater share of advertising inventory on its platform.

Additionally, Amazon's deal with the NFL to stream Thursday Night Football brings a lot of high-value ad inventory along with it. While the company is paying a lot for the sports rights, it will provide a significant boost to its digital video advertising sales.

As Amazon continues to grow its ad business through the 2020s, investors should see continued improvement in the company's overall operating margin. That could enable Amazon to keep the price for Prime relatively low, invest in other areas like digital video content, and explore new business opportunities for the next step up in revenue growth or margin expansion.