Amazon’s Advertising Business, 9 Things to Consider
What is Amazon? Have you thought about that lately? Well if you said it’s just a retailer then Amazon has got you fooled. Amazon is an eCommerce giant, an owner of many brick and mortar stores, a cloud computing company, a streaming company and an advertiser among many things.
While the fanfare around Amazon often centres around its widely popular website, Amazon should get credit for its ability to create billion dollar businesses from scratch. Before Amazon came along most retailers defined their scope rather narrowly, they are in the business of buying and selling things. But Amazon has always had broader ambitions than being “just” a retailer. That can be seen in its burgeoning advertising business. When Amazon disclosed the sales of its multi-billion dollar advertising business earlier this year for the first time it’s hard to know who let out a bigger gasp, Walmart or Facebook. Maybe you were also surprised and want to learn more. If you do then here’s nine facts about Amazon’s advertising business that show why everyone is paying attention to Amazon’s next move.
1. A decade and billions of dollars later. Amazon quietly launched its advertising business in 2010 building it up over time, under the radar, similar to what it did with Amazon Web Services. But its advertising business got so large, reaching $31 billion in 2021, Amazon disclosed its size for the first time in the fourth quarter of 2021.
2. Amazon’s size lures in brands and advertisers. The structure of Amazon’s business naturally creates demand for advertising sales. One of the ways it does this is through third-party sellers on its platform which compromised 56% of Amazon’s unit sales in the fourth quarter of 2021. If you shop on amazon.com you will have likely noticed more and more sponsored ads from third party sellers. Since there are millions of listings on Amazon brands have an incentive to advertise on Amazon to get a shoppers attention hoping they will click on their ad and then buy their product. “A marketplace is one of the flywheel components that drives the advertising business for Amazon, because every keyword can be bid against by hundreds or thousands or possibly hundreds of thousands of sellers,” said Mike Black, CMO of Profitero.
Amazon is also one of the most popular websites in the world with billions of visits to its website each month. Where eyeballs go brands follow making it a lucrative place to advertise.
3. Amazon has its eyes set on TV advertising budgets. Amazon is trying to get a share of the $70 billion that is spent on TV advertising. To do this it is pitching advertising inventory across its many assets including IMDbTV, Twitch, Fire TV and Thursday night football (Amazon now has the streaming rights). Since nearly 90% of Amazon’s advertising sales comes from advertising on amazon.com there is an opportunity to generate more advertising dollars from Amazon’s other properties. Amazon’s ad-supported video content reaches over 120 million viewers each month illustrating why these assets are not only important for reeling in prime subscribers but also for monetizing them.
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4. Amazon is working on diversifying its advertisers. Amazon is not content with only have third party sellers advertise on amazon.com it is also trying to get companies that do not advertise on its website like insurance and car companies and movie studios.
5. Apple’s privacy changes stand to benefit Amazon. With Apple’s privacy changes taking in affect in iOS 14.5 Amazon’s data will be even more lucrative for marketers. Because of those changes it is now harder for Facebook to target users and measure the effectiveness of ads. Amazon on the other hand can measure exactly how many times a shopper saw or clicked on an ad or purchased a product afterwards. “The advertising team has done a great job of turning clicks into productive sales,” said Brian Olsavsky Amazon’s CFO . “We’re using new deep learning models to show more relevant sponsored products, we continue to improve the relevancy of the ads being shown on the product detail pages and we’ve seen rapid adoption of the video creative format for sponsored brands, among other things.”
6. Amazon’s advertising business is growing rapidly. Amazon’s advertising business grew by 32% in the fourth quarter of 2021 reaching $9.7 billion. With $31 billion in advertising sales for all of 2021 Amazon comes in third in digital advertising sales in the United States behind Google (28.6% share) and Facebook (23.8% share). Its advertising business is even larger than YouTube’s which made $28.9 billion in 2021. Even though Amazon does not report the operating margin for its advertising business it is thought to be very high. With such thin margins in Amazon’s retail business the higher margins in its advertising business can subsidize things like faster delivery times. Having more profitable businesses like Amazon Web Services and advertising helps to keep Amazon ahead of competitors who only play in the retail industry which has razor thin margins.
7. Amazon makes more on advertising than it does on brick and mortar retail. Amazon’s advertising business generated 6.6% of Amazon’s 2021 sales, more than what Amazon’s brick and mortar stores generated. You may be thinking that Amazon doesn’t have many stores but it actually has a fairly large and growing network of more than 600 stores. To give that some context, Macy’s has 576 stores. Amazon’s stores made $17 billion in 2021 or 3.6% of sales. It’s remarkable that Amazon’s advertising business is already outperforming its fairly large store network.
The size of Amazon’s advertising sales in 2021 alone would make it a top 20 retailer in the United States. For example, Dollar Tree, the 19th largest retailer in the United States made $25 billion in 2020.
8. The competition is heating up. The size of Amazon’s advertising business has spawned knockoffs with retailers such as Walmart, Instacart and Target creating their own retail media businesses. Recognizing Amazon’s lead in this area, back in 2018 Walmart’s CEO Doug McMillon said: “we have a tiny ad business. It could be bigger.” Fast forward a few years and Walmart’s digital advertising business is still small but Walmart is committed to growing it.
9. The decline in traditional advertising will keep this revenue source growing. Digital advertising sales have grown steadily over the years with digital making up 64.4% of total advertising sales in 2021 up from 52.1% in 2019. As traditional advertising continues to decline Amazon is poised to grab more of the advertising pie bolstering its sales in the process.