Is Amazon a Sleeping Giant in U.S. Advertising?

This is the latest in LSA’s Skate To Where the Puck is Going series. Running semi-weekly, it examines the moves and motivations of tech giants as leading indicators for where markets are moving. Check out the entire series here, and its origin here

In the advertising world, there’s ongoing speculation about Amazon’s rise to challenge the Google/Facebook duopoly. This is a legitimate threat, given Amazon’s operational scale and consumer engagement. It’s already eating into Google’s search volume. Blitzing ad monetization is a logical next play.

Advantages include revenue diversification and profitability. Ad margins are higher than eCommerce and could be a meaningful profit center. Piper Jaffray even estimates that Amazon’s ad business will eclipse AWS as the company’s biggest profit engine by 2021. That’s saying a lot, given AWS runaway success.

With that backdrop, it’s evident that its ad business is gaining steam. It reached roughly $3.6 billion in Q3.  Though Amazon doesn’t break out ad revenue, the revenue category is the majority of its “other” line item. This category grew 45 percent year over year, with the advertising subset outpacing that.

Panning back from Q3, Amazon topped $10 billion in annual ad revenue last year according to CNBC.  and eMarketer predicts it will account for 10 percent of U.S. digital ad revenues by 2020. That would place it third behind Google and Facebook which have a combined 60 percent share of U.S. ad revenues.

All of this comes just weeks after Amazon held an event in Seattle called AdCon which demonstrates mindshare for ad revenue. 400 people were invited to the 2-day event to educate brands on “how to use Amazon Advertising to create connections with shoppers at key moments across the purchase journey,”

As for what kind of ads Amazon offers, currently it lets brands and smaller businesses promote products across Amazon and its properties. This is subdivided into a few formats such as display, video and custom ads. A new ad product called “Stores” involves a custom digital storefront.

The growing complexity of this ad suite does indeed compel a conference for educating the industry. What will likely happen is that an ecosystem will form around Amazon advertising, similar to SEO and SEM agencies. Revenue in the category will reach levels that there’s a sort of osmosis of demand-side services.

But though daunting and fueled by Amazon’s scale, there’s only so much impact it can have. It only applies to advertisers in certain verticals including consumer goods manufacturers and specifically those with e-commerce sales. So that rules out lots of local commerce like brick & mortar products and home services.

Examples so far include mattress company Tuft & Needle and pet food provider “I and Love and You” (likely Avett Brothers fans). These will likely grow in number as Amazon builds out its advertising suite. We’ll be watching closely for strategic implications for the local advertising & commerce picture.

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