You might be surprised to find out that e-commerce giant Amazon (AMZN -4.03%) is also a significant player in the advertising market. The business is becoming so large for Amazon that it broke out ad revenue as a separate segment when it reported fourth-quarter results.
Since the pandemic onset, the company regularly boasts quarterly sales of over $100 billion. It's no surprise that marketers are willing to pay for the opportunity to persuade shoppers on Amazon.
Amazon's advertising business is getting too big to ignore
Indeed, Amazon's advertising revenue in its most recent quarter ended Dec. 31 totaled $9.7 billion. That was 33% higher than the same quarter the year before. Revenue growth in the segment is decelerating after it surged to a year-over-year rate of 88% in second-quarter 2021. This is the first time investors will get a detailed look at ad revenue from Amazon, which previously coupled advertising with miscellaneous items in its "Other" segment.
Management made the decision to break out advertising on its own after considering how large a proportion it was encompassing in its other segment. Furthermore, since the company is starting a new fiscal year in the next quarter, it decided it was the right time to break out ad revenue on its own.
Third-party sellers, which made up 56% of overall unit sales at Amazon in Q4, are a big part of Amazon's advertising spending. Businesses that have items for sale on Amazon's website stand to benefit tremendously from advertising. Amazon boasts over 200 million Prime members. These consumers have a payment method on file and access to fast and free shipping. If businesses can place their products in front of these buyers, they are only one click away from purchasing.
One estimate suggests that marketers spent $763 billion on advertising in 2021. That was up by 22.5% from 2020. The trend within the ad industry is an increasing shift to digital channels. Marketers undoubtedly prefer the measurement capabilities that digital provides. Businesses can determine precisely how many people clicked their advertisement on an Amazon sponsored listing. In contrast, there is no telling how many people saw your billboard on the side of the freeway.
Another benefit of digital advertising is the proximity to a purchase. Consumers driving on the freeway looking at your billboard or listening to your radio ad are unlikely to purchase at that moment. At the same time, most folks have their payment info saved on their phones and can go from seeing an advertisement to buying in as little as a few seconds. In 2021, digital advertising totaled 64.4% of the overall, up from 52.1% in 2019. That trend seems unlikely to reverse.
Amazon is a major force in the ad industry
In its previous four quarters, Amazon earned $31 billion in ad revenue. Considering the total sales that take place on the site and the number of ready shoppers who visit Amazon, it is poised to take a larger share of the $763 billion ad industry.
Advertising is an inherently more profitable business than e-commerce sales. If ad revenue keeps growing faster than the rest of its business, as it did in Q4, Amazon's operating profit margin can expand from the 5.3% it sustained in the previous 12 months. That's good news for stockholders, to be sure.