"Many people think our main competition is Bing or Yahoo. But, really, our biggest search competitor is Amazon."
-Eric Schmidt, Google, 2014
Amazon’s advertising business is up 620% over the last four years. On a compound annual growth rate basis, it grew 64% each year since 2017.
It is now solidly the third largest digital advertising platform behind Google and Facebook, and it has inspired every rival to develop some sort of advertising offering.
Amazon has built this business on the back of paid search advertising units that provide marketers the warm and fuzzy feeling of direct measurability. Sponsored Products, Sponsored Brands, and now Sponsored Brand Videos continue to see rising CPC’s alongside increasing inventory loads.
But Amazon is not stopping there. Its advertising teams have been given a major goal to tap brand marketing dollars, selling the effectiveness and reach of its unique data.
And just how important is this business to Amazon?
In the last quarter, Amazon delivered total operating income of $4.9 billion. The composition of this income is entirely from its cloud business (AWS) and advertising, with retail suffering multi-billion dollar losses.
To be precise, AWS brought in $4.9 billion, while advertising is conservatively estimated to have brought in $2 billion, almost exactly offsetting the $2 billion in retail losses.
It wasn’t just a one-off either. Since the beginning of 2017, Amazon’s ad business has accounted for two-thirds of its total operating income excluding AWS, and has delivered greater dollar profitability in 14 of 19 quarters.
This explains the challenge in eCommerce – profitability! Even Amazon, a company designed entirely for digital commerce, being in business for 27 years, reaching an annual run rate of $650 billion in gross merchandise value, struggles to generate a profit.
To think of it differently, the annual losses from the diagram below, if combined, would total tens of billions of dollars. Amazon’s omnichannel rivals see only one way out, and it’s not making money off directly selling consumer goods. Advertising, memberships, help from omni-enablers and a digital narrative that brings investor patience and potentially a multiple re-evaluation is the path forward.
Selling on these different sites means advertising on these sites. It is why agencies and technology platforms that enable this for consumer brands are seeing significant capital investment flow to them and consolidation is rapidly occurring in that space.
The big question remains for consumer brands - how does the growth of Amazon’s advertising business and the lack of profitability available online, impact store-level retail programs and established P&L dynamics?