When investors think of Amazon (AMZN 3.43%), their minds naturally conjure up images of massive e-commerce operations and smiley-faced boxes -- and with good reason. From its humble beginnings as an online bookstore, Amazon has evolved, earning the moniker "the everything store" for its seemingly endless product selection. The company also made a name for itself by offering the first on-demand cloud infrastructure service, and Amazon Web Services (AWS) continues to lead the industry it pioneered back in 2006.
Artificial intelligence (AI) has been all the rage this year and Amazon recently made headlines with a sizable investment in the AI start-up Anthropic. It will be deeply integrated into AWS' cloud offerings, which could boost cloud revenue.
Yet there's another industry that Amazon has in its sights, where it is quickly gaining share in what is already a $1 trillion market: online advertising.
Image source: Getty Images.
Amazon is becoming a power player in digital advertising
Over the past several years, Amazon vaulted up the ranks to become the third-largest online advertiser worldwide with 7% of the market, behind just Alphabet (GOOGL 10.22%) (GOOG 9.96%) and Meta Platforms (META 0.43%), which control 39% and 18%, respectively. To be clear, Amazon controls just a small part of a large and growing market, but the company is stealing share from its competitors.
In 2022, Alphabet grew its advertising sales by just 7% year over year, while Meta Platforms' ad revenue actually declined by 1%. At the same time, Amazon grew advertising revenue by 21%, capitalizing on the weakness of its rivals to steal market share.
That came on the heels of a 58% increase in 2021 and a 57% increase in 2020 -- the year Amazon first broke out advertising in its financial results. Advertising services brought in nearly $38 billion for Amazon last year and was the company's fastest-growing business segment.
Yet recent developments illustrate that Amazon is leaning into its latest growth driver and has plans for the business to be much bigger.
Prime real estate for advertising is opening up at Amazon
Amazon established a beachhead in the online advertising industry by offering sponsored and display ads to merchants selling their wares on its e-commerce site. However, this was just the first volley in a growing campaign to increase its ad revenue.
The company recently announced that beginning in early 2024, viewers of its Prime Video streaming service will be subjected to "limited advertisements." While Amazon promises "meaningfully fewer ads" than broadcast television, it opens up a whole new advertising venue for the company. Amazon will also offer viewers the option to continue watching Amazon Prime ad-free for an additional subscription price of $2.99 per month.
This suggests the company plans to earn at least that much per viewer from advertising. With 200 million Prime subscribers, that works out to nearly $7.2 billion in additional revenue per year, though estimates vary on how much the company will actually bring in.
UBS analyst Lloyd Walmsley calculates that Amazon can generate about $6 billion in incremental revenue and roughly $5 billion in additional operating profit. If those calculations are even close to correct, that could boost Amazon's annual ad revenue by as much as 16%. Of course, not everyone will opt to watch ads, so some of that revenue will end up as subscription revenue, but it helps to illustrate how Amazon is leaving no stone unturned in its quest to boost its ad revenue.
Amazon also owns the Internet Movie Database (IMDb), an online portal that offers information, ratings, and reviews for films, television series, podcasts, video games, and streaming content. The free site uses advertising to support its services.
There's also Freevee (formerly IMDb TV), Amazon's free, ad-supported television (FAST) streaming channel, which offers a vast catalog of digital movies and television shows to viewers at no additional cost.
A long road ahead
To be clear, Amazon still has a long way to go to catch up to Alphabet and Meta Platforms, which generated ad revenue of $224 billion and $114 billion last year, respectively.
That said, the opportunity is vast. The digital advertising market was worth $629 billion in 2022 and is expected to climb to $1.2 billion by 2027, a compound annual growth rate of nearly 15%, according to BCC Research.
This highlights the long and potentially lucrative road ahead for Amazon as the company continues to expand further into online advertising.
