Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) have ranked first and second in U.S. digital ad revenue for several years now, dominating this particular market and operating what some would call a digital ad duopoly. But the two dominators of the digital ad space had better watch out because at least one competitor is approaching fast on their heels.

That competitor is Amazon (NASDAQ:AMZN). Amazon has built itself into a massive retail behemoth that at least 200 million Amazon Prime shoppers often look to first when making a purchase. And that dominance is helping it make inroads into the digital ad space.

A digital chart labeled performance being drawn with an upward arrow.

Amazon's ad revenue is growing exponentially. Image source: Getty Images.

Fighting for your attention 

Amazon reports its advertising revenue in its "Other" business segment. That segment reported revenue of $6.9 billion in the first quarter of 2021, which was an increase of 73% from the prior year's Q1. What's more, the growth rate was an acceleration of the growth rate in the fourth quarter of 2020 (64%), and that was an increase from the third quarter of 2020 (49%). Annualized Amazon's adverting revenue brought in $21.5 billion in 2020, which was up 53.5% from $14 billion in 2019.

Compare that to Facebook's revenue (which nearly all comes from advertising) of $86 billion in 2020. That sum trumps Amazon's ad revenue, but the key is looking at Facebook's revenue growth in the last few years -- from 54% in 2016 to 21.6% in 2020. Similarly, Alphabet's revenue growth went from 20.4% in 2016 to 12.8% in 2020. While Alphabet and Facebook are slowing down, Amazon is accelerating.

The expansion of Amazon's advertising revenue is not going to slow down anytime soon. eMarketer projects Amazon's ad revenue will reach $19 billion in 2021 on its way to $25 billion in 2022. Simultaneously, Amazon would be increasing its market share of overall digital ad spending from 7.8% in 2019 to 12.7% in 2022. More and more marketers are looking to Amazon when allocating their spending budget.

Two sources are powering Amazon's digital ad growth: Search and display ads and its video advertising unit. Marketers covet access to the 200 million Prime members who have their credit cards on file with Amazon and are one click away from making a purchase. These shoppers also have access to fast and free shipping, removing another friction point in the buying process. When buyers search for a product on Amazon's website, businesses want their products to show up first. 

Facebook and Alphabet will have difficulty countering this encroachment in their market. Amazon is the only retailer with a website ranked in the top 10 most visited websites. And arguably capturing the attention of a person visiting Amazon.com is more valuable to a marketer because that person has logged on to Amazon likely with the intent to buy something on that visit.

What this could mean for investors 

Advertising could add a lucrative source of revenue and profits (Alphabet and Facebook consistently generate operating profit margins north of 20%) to Amazon's flywheel. The e-commerce retailer is known for investing in its customer experience by offering free and speedy shipping. If Amazon can maintain the growth in its ad revenue, it can help fund even more investments in the customer experience, which will attract more customers.

That could spell trouble for Alphabet and Facebook as marketers could continue directing a larger part of their budgets to Amazon. As of now, Alphabet and Facebook are still the dominant players in the digital advertising market, but Amazon is on their heels and catching up fast. 

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.