In the rapidly evolving world of online advertising, online retail giant Amazon.com (NASDAQ:AMZN) enjoys one of the most intriguing opportunities in the space
Never one to overlook a money-making opportunity to help buoy its low-margin retail business, Amazon began serving ads in 2010 to great success. This year alone, eMarketer estimates that Amazon will generate $1.26 billion in ad revenue, up from $1.03 billion last year.
Many advertisers understandably welcome increased competition in this booming space between Amazon and the two other dominant forces in digital advertising today, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook. And a recent move on Amazon's part only helps further this storyline.
Amazon's ad changes
Recently, Amazon notified advertisers that it will no longer offer Product Ads at the bottom of search results that redirect traffic toward third-party retail sites. Such Product Ads proved popular with companies that preferred not to sell through Amazon's core e-commerce platform but still sought a means to access Amazon's roughly 280 million-strong customer base.
For example, a site selling running shoes might purchase Product Ads from Amazon. A user clicking on this Product Ad would then be transferred to the running shoe site to purchase a running shoe, rather than buying a shoe on Amazon.com.
But Amazon is not abandoning ads entirely by any means. Instead, it will now sell simple text advertisements to appear in its search results. Amazon typically provides scant information regarding strategic moves like this, and a request for explanation from The Wall Street Journal on the matter received no comment. However, in considering Amazon's possible motives, it appears that this move could carry some competitive motivations both large and small.
Amazon wins and Google loses
From a strategic perspective, this move appears to strengthen Amazon's e-commerce platform in two ways. First, by making it more difficult for its competitors to attract visitors to their sites, Amazon could drive merchants and sellers further into its own e-commerce ecosystem.
For example, high-end brands often try to avoid selling through Amazon because they forfeit pricing control once Amazon controls the selling experience. Amazon has shown a strong historical tendency to slash prices on luxury items as it does for virtually all products. High-end product firms worry that this can (at worst) lead to a loss of pricing power throughout their entire business, and as such try to avoid it. However, by removing alternatives like ads that redirect customers to their sites, Amazon could potentially force such retailers toward its own e-commerce platform.
Second, this move will also help Amazon retain coveted customer relationships and billing information. However, this move also potentially delivers a blow to one of Amazon's chief advertising adversaries -- Google.
According to the WSJ reporting, Google used Product Ads as a means of obtaining massive troves of user data that it almost certainly used to more precisely target its own ads. It appears that Amazon's new ad formats will make this task far more challenging for Google.
Again, similar to the above implication for third-party sites, Amazon's move against Google might diminish Google's insight into customer behavior on the margin. Weakening its visibility into how 280 million people shop could certainly hurt Google. That said, given the sheer enormity of Google's own ability to gain insights on consumer behavior, Amazon has far from negated Google's ability to match interested consumers with advertisers.
So if this recent move by Amazon won't have a major financial impact on any of the parties involved, why does this storyline matter?
More than anything else, it again demonstrates Amazon's fantastic willingness to evolve its platform and various services to benefit itself: and if possible, to hamper its competitors. This somewhat ruthless tendency helps explain much of Amazon's enormous success. So while well short of game-changing, this storyline once again helps highlight a defining tendency of Amazon's business behavior that anyone considering the e-commerce giant must understand -- and likely love as well.
Andrew Tonner has no position in any stocks mentioned. The Motley Fool both recommends and owns shares of Amazon.com, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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