For Amazon (AMZN -1.14%) and eBay (EBAY 1.01%), advertising is becoming a lucrative source of revenue. Each hosts over 100 million ready buyers with payment information on file that marketers covet access to.
However, many of the businesses that advertise on Amazon and eBay are also sellers on the sites. This means that spending on promoting products on the platforms is increasing the cost of operations.
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Prime real estate
In its fiscal second quarter, Amazon reported an 83% increase in revenue from the same quarter last year in a segment consisting mostly of advertising. The division has reported over $7 billion in revenue in each of the last three quarters. Some of this spending goes to streaming TV ads and on Amazon's Twitch gaming service. The rest is spending to get prized real estate on Amazon.com.
A seller of phone covers wants to reach the top spot in search results on Amazon.com. For this privilege, it can pay to be a sponsored product that shows up near the top of results. With more than 200 million Prime members who are one click away from purchasing, businesses want access to that buying power. Scroll a bit further down, and you will find more sponsored products based on the same search.
Businesses already pay Amazon a percentage of each sale made on the site. So Amazon's advertising is another way to raise fees on sellers. Consider that my search for phone covers would produce a certain number of results without the sponsored product feature. The sponsored product feature produces similar results, but some businesses now pay to show up higher on my search query. Competitors observe spending by rivals and decide to either ramp up spending or suffer a lower ranking.
Bidding for position
Similarly, eBay is bringing in more ad revenue. Management said, "In Q2, ad revenue outpaced volume driven by Promoted Listings, which delivered almost $224 million, up 8%. More than 1.4 million sellers promoted over 430 million listings during the quarter." Again, businesses are spending to get preferential placement in search results. If you don't pay, you get outranked by competitors that do.
Like Amazon, sellers on eBay pay a percentage of sales to the company. That percentage (take rate) has been steadily increasing on eBay over the last several quarters, rising from 9.2% in Q2 2020 to 11.3% in Q2 2021. And it was the main reason eBay increased revenue in the most recent quarter, while spending on its site decreased.
Investor takeaway
The size and scope of eBay and Amazon give them the pricing power to extract an increasing share of sales from sellers on their sites. However, the strategy comes with risks. It could give sellers a reason to take their products off the platforms and go someplace else. Reopening economies will allow some businesses to recoup sales through brick-and-mortar channels. For digitally native businesses, other solutions like Shopify may become more attractive.
Investors will want to watch closely and make sure Amazon and eBay tread carefully to avoid alienating sellers on the platforms.
