December 9, 2023

Vision Cim

Thank Business Its Friday

Here’s why Amazon’s $30 billion advertising business is so effective

(Bigstock Photo)

Industry trends, consumer shopping habits, and Amazon’s continued e-commerce dominance have helped turn the tech giant into an advertising behemoth.

The company’s ad business recently surpassed a $30 billion annual run rate in the third quarter. Wall Street expects advertising revenue to eclipse $10 billion for the holiday quarter when Amazon reports earnings Thursday afternoon. (Update: Amazon reported $9.7 billion for “advertising services,” a new section on its earnings release)

Amazon does not break out specific financials for advertising, but its “Other” category primarily includes sales of advertising services. And revenue for that category has skyrocketed over the past few years, now making up more than 7% of Amazon’s total revenue and helping fuel its bottom line given the high profit margins in digital advertising.

Amazon’s advertising arm is eight times as large as Snapchat’s entire business, and nearly seven times as large as Twitter. It is increasingly taking market share from Google and Facebook, the longtime digital advertising kingpins.

Analysts point to a few reasons for Amazon’s booming ad biz.

Amazon — not Google — has become the go-to starting point for online shoppers. A report from Jungle Scout found that 74% of consumers begin their product searches on Amazon.

(Jungle Scout Chart)

If you’ve searched for anything on Amazon recently, you may have noticed a featured brand on the top banner, and that the first products shown have a “sponsored” tag.

Sellers know where consumers are searching, and they are paying for visibility.

“Amazon has done such a great job of becoming the ‘Everything Store’ that they have been able to convince consumers that whatever you want will be there,” said Wedbush analyst Michael Pachter. “Instead of searching on Google, Amazon customers commence product searches on Amazon, hence a shift of ad dollars away from Google and to Amazon.”

A search on for “dish soap” shows four different “sponsored” search results, as well as a paid placement at the top of the page.

Pachter also noted that many manufacturers are paying for sponsored slots on search results. Even with the extra advertising fees, companies such as Sony or Hamilton Beach can keep more revenue by selling directly on Amazon versus going through a retailer, said Pachter.

Advertising spend on Amazon far outpaces other e-commerce platforms including Walmart, eBay, and Etsy.

There are also macro trends playing in Amazon’s favor.

Andrew Frank, distinguished vice president analyst at Gartner, pointed to the deprecation of third-party cookies. That move has “shifted digital ad budgets toward walled gardens with the data and media advertisers need for scalable targeted campaigns,” Frank said. That’s exactly what Amazon’s retail marketplace offers.

Another factor: the pandemic spurred an e-commerce boom, driving more shoppers online. Amazon reported a whopping $125.6 billion in revenue in the holiday quarter of 2020.

Google, meanwhile, saw advertising revenue rise 33% in the fourth quarter last year to $61.2 billion. Facebook’s ad revenue grew 20% to $32.6 billion last quarter.

Digital advertising spend is expected to reach $524 billion this year, and $645 billion by 2024, according to Statista.

Amazon also generates ad revenue beyond its e-commerce platform, with its video arm, Prime Video, and streaming hardware such as the Fire TV. The company also has a streaming deal with the National Football League.

“Its rapid success in advertising is part of the larger trend of consolidation of power by walled garden platforms that benefit from network effects across a diverse portfolio of digital assets,” Frank noted.