By Christopher Mims
It's easy to see how Amazon.com Inc. threatens the world's
retailers. But analysts, brands and advertising agencies are waking
up to the fact that a growing piece of Amazon's business impinges
on turf now controlled by two other tech titans, Google and
Facebook.
Amazon's decade-old advertising business hasn't generated much
revenue or notice until recently. One sign of the turning point was
last June, at the annual meeting of advertising giant WPP PLC.
Calling the retailer "highly disruptive in many ways," WPP Chief
Executive Martin Sorrell projected the firm would spend $200
million placing ads with Amazon in 2017.
Amazon doesn't break out advertising as a separate business, but
according to a new report by J.P. Morgan analyst Doug Anmuth, the
company racked up an estimated $2.8 billion in 2017 ad revenue.
That's small compared with his estimate for Google's ad revenue in
2017: $73 billion. Yet in 2019, he expects Amazon's revenue to more
than double to $6.6 billion.
Amazon's advertising success is directly related to its retail
business. Consumer packaged-goods companies now spend more on
digital advertising than all varieties of nondigital advertising
combined, according to Cadent Consulting Group. Google's search ad
business leans on the premise that a customer researching a
purchase will click relevant ads that will lead to a sale. Google
has incredibly rich data from our search and browsing histories,
and Facebook lets advertisers combine our social graph with other
data, like where we've been and what we've bought.
But Amazon has a huge set of data that Facebook and Google can't
access -- namely, its own. Already, more than half of all online
searches for products start on Amazon, and of those a majority end
there, according to various surveys. That figure has grown every
year that pollsters have tracked it.
What happens when and if Amazon is not only the biggest online
retailer in the U.S., but also one of the biggest physical
retailers, with total sales greater than those of Walmart and all
the data and technical chops of a Facebook or Google?
How it works
Thousands of brands large and small, selling through Amazon's
Marketplace seller program, are now what drives Amazon's rapid
growth in ad revenue. Jijamas, founded in 2013, wouldn't exist
without Amazon, says Gustavo Sanchez, the brand's co-founder and
chief executive. Jijamas sells one thing: Supersoft, high-end
women's pajamas.
Starting at about $70 a set, they rarely turn up near the top of
search results for "pajamas" on Amazon, says Mr. Sanchez, since the
site's algorithm favors cheaper, higher-volume goods. Even its high
customer ratings only help Jijamas get so far.
The company's revenue growth is dependent on Amazon advertising,
Mr. Sanchez says.
Advertising on Amazon is much like advertising on Google's
AdWords platform, says Daniel Knijnik, chief executive of Quartile,
a small ad agency started last August that focuses solely on
Amazon. Most ads appear atop search results for various
keywords.
Advertising plays an important role in Amazon's lucrative
direct-to-consumer marketplace, where Amazon, at added cost,
provides warehousing and shipping to third-party sellers. Because
advertising allows brands to connect better with Amazon's shoppers,
Mr. Knijnik says, even manufacturers who previously sold wholesale
to Amazon are now opening their own "stores" on the site.
For sellers like Mr. Sanchez, advertising on Amazon is a mixed
bag. A "sponsored" listing is essential for getting products to the
top of search results, which is the only surefire way to sell
anything on a site that offers millions of different products. But
sponsored lists are also another way Amazon skims off his
profits.
On top of the 15% of an item's selling price that Mr. Sanchez
pays just to list Jijamas on Amazon's marketplace, and the 5% to 6%
he pays to have Amazon warehouse and ship his products, there is
now up to 12% going to advertising for every item sold through an
ad. This April, Amazon will start charging an additional 2% to list
apparel (it hasn't disclosed why). The net result is that Amazon
will take about 35% of the price of each pair of Jijamas sold
through its sponsored listings.
If Amazon decides to change its search result ranking algorithms
or hike its ad fees, "there's nothing I can do about it," Mr.
Sanchez says. Amazon represents 65% of his total sales, he adds;
the remainder comes from his own website.
Where it can grow
Amazon is continually building and buying new sources of data on
our tastes and consumer behavior, from its acquisition of Whole
Foods and the build-out of its cashierless Amazon Go stores to the
invasion of its low-cost, voice-powered speakers and the rapid
increase in its library of streaming video.
Every time Amazon racks up another percentage point of the $5
trillion U.S. retail pie, another $50 billion in the kind of data
that Google and Facebook relied on disappears from their systems.
Plus, Amazon understands shoppers in a way Google and Facebook
might not.
"Amazon doesn't just know what you buy, they also know about how
you shop," says Diana Gordon, director of Shop+, the
ecommerce-focused arm of WPP-owned ad firm Mindshare. "They know
your browsing behavior, the cadence with which you restock certain
types of consumables," she adds.
Amazon is building out not only its self-service ad business but
also the sales team devoted to getting brands on board.
All of this could give Amazon an edge over Google and Facebook,
but for it to scale that business, it will have to look beyond ads
targeted at consumers who are already shopping on its sites.
For that, Amazon has a web-spanning advertising network just
like Google's and Facebook's -- which is the reason a vacuum
cleaner you once almost bought can haunt you for weeks on random
websites. The Amazon Advertising Platform lets advertisers manage
ad buys across multiple advertising exchanges, and it has quietly
become as familiar to marketers as its equivalent from Google-owned
DoubleClick.
Amazon also needs to expand the number of places it can sell
advertisements, which is one reason the company bought
videogame-streaming behemoth Twitch and is investing so heavily in
its own streaming-video offerings.
The company has been creative about where it places ads -- ever
notice a movie ad on the side of an Amazon box shipped to your
house? Perhaps, in the future, there could be an audio ad exchange
for podcasts and skills delivered through Alexa. Maybe, some day,
delivery drones will just shout the latest deals to a terrified
populace?
Write to Christopher Mims at christopher.mims@wsj.com
(END) Dow Jones Newswires
January 28, 2018 09:14 ET (14:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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