When Jeff Bezos famously said, “Your margin is my opportunity,” he was referring to retailers’ historically high margins and Amazon’s intent to undercut them with lower prices and economies of scale. Amazon is now exploiting a similar opportunity with digital advertising.
For years, Amazon kept advertising on the site subtle for fear of alienating shoppers who had become used to choosing what to buy based largely on customer reviews and price.
Amazon has been slowly giving more prominent placement to sponsored products in search results, forcing brands to buy ads to win top billing.
It’s easy to see why. By 2021, advertising on websites and mobile devices will account for half of all ad spending in the U.S., capturing greater share than television, radio, newspapers and billboards combined, according to EMarketer Inc.
Why Bezos is all in for Advertising
Amazon has an advertising platform no other company can match: A web store selling hundreds of millions of products combined with a streaming entertainment service and a trove of data about customer preferences.
Amazon attracts 180 million U.S. visitors each month—all or most with shopping on their mind. And as more people shop on smartphones, they’re skipping search engines like Google for Amazon’s mobile app.
Amazon’s advertising business is now worth $2 billion, which is about 60% growth year over year. Pundits expect Amazon to shake up the Google-Facebook ad duopoly. But what many are overlooking is Amazon’s role as an advertiser, an ad network and a marketplace.
Bezos prides himself on playing “chief showdown officer.” He’s looking for three things. First, originality. “We have to have a differentiated idea. It can’t be a ‘me too’ offering,” he says.
Second, scale. “We’re gifted with some very large businesses we’ve built over time, and we can’t afford to put our energies into something that if it works, it’s still going to be small.”
And, finally, a Silicon Valley-worthy ROI. “Even at substantial scale, it has to have good returns on capital.” The advertising business check marks all of this. To boot, Amazon already has some serious advantages compared to other ad tech players.
1. Header Bidding: First Mover Advantage
Amazon is now the third most popular header tag. Header bidding gives brands access to premium ad inventory that was previously only available via direct deals with publishers.
But Amazon benefits even more from header bidding because it’s both an advertiser and an ad network. It doesn’t need to use an exchange to get into the header and thereby doesn’t pay the typical 15% exchange fee.
Amazon then saves another 15% by incorporating its own demand-side platform into the process. Plenty of advertisers access headers using their ad tech vendors, but they’re paying a 30% premium that Amazon isn’t paying.
This puts Amazon in a formidable position. Imagine being able to bid 30% higher than competitors but still keep your margins. Think of all the additional high-quality users advertisers would be able to reach and the boost in sales volume that would follow.
2. Attribution: Reduced Hassle for the CMO
Amazon is different from fellow walled gardens Google and Facebook. Google Display Network and Facebook Audience Network ads don’t go back to Google or Facebook for purchase.
But Amazon ads go back to Amazon where the company gets a cut of the transaction fee. That results in lesser to and fro b/w Ad Ops teams and the nagging questions around attribution which would otherwise follow as in the likes of both FB and Google.
3. Over-the-top Media: Fireworks with the Firestick
Amazon subsidiary IMDb is expected to announce this month a free, ad-supported video service for Fire TV users, according to several people with knowledge about the matter.
The new service, which will be similar to The Roku Channel or some parts of Hulu, will feature TV shows and movies. It will be available to all Fire TV users, not just Prime Video users.
The move could help Amazon capture revenue from the lucrative TV ads market, which is expected to generate almost $70 billion in revenue in the U.S. this year alone.
Ad budgets for over-the-top services, where people can watch TV without a cable or satellite subscription, are about $7 billion, according to Merkle. But the market is growing rapidly.
Here’s Why CMOs Should be Skeptical
If you were the CMO of a fortune500 company, would you risk giving away your first party data to someone who will figure out the margins of your trade and has the capability to compete and ultimately beat you based on its scale and distribution capabilities ?
Take, for example, an independent seller that takes the risk of selling a new product on Amazon that wasn’t widely available before. If the product becomes a hit, then Amazon can create its own version of it and undercut the independent seller.
What We Can Expect from Amazon
There are some potential acquisitions Amazon could make in the ad tech space.
First, a mature DSP with a strong UI would benefit Amazon. It would allow the company to continue using its unique data as a differentiator, but shortcut the tedious and time-consuming process of designing and developing a full-feature DSP around that precious data. To that end, targets could include MediaMath, DataXu, even The Trade Desk.
The second potential acquisition category: An SSP or exchange. Amazon is now a formidable player in the header bidding space, particularly on the server side, but it lacks its own exchange—like how Google has AdX. By purchasing a mature exchange like Rubicon, Index, or OpenX, Amazon would have the ability to capture more value (and compete in the price war), and potentially favor its own exchange in the header auction as well.
Amazon is slowly but surely chipping away at its larger advertising rivals. This year, its US ad revenues will climb 63.5% to surpass $2 billion for the first time. This expansion will give Amazon a 2.7% share of the country’s digital ad market. By 2020, that share will grow to 4.5%.
Amazon finds itself in fifth place among the top digital ad sellers in the US, and it’s on track to be No. 3 by 2020—surpassing both Oath and Microsoft.
The ad business was noticeably absent from CEO Jeff Bezos’ shareholder letter, but there has been serious growth in both sponsored products and headline search ads.
Bezos is not tethered to conventional thinking. In the words of his former colleague: “Bezos is bound only by the laws of physics. He can’t change those things. Everything else he views as open to discussion.” Amazon, is no longer the sleeping giant in advertising.