Amazon’s advertising business emerged as the star of the company

For big Internet companies that make a living selling ads, these are tough times. As in any kind of economic downturn, businesses sharply cut back on advertising spend. For Amazon.com Inc., however, whose e-commerce business is taking a hit, advertising is proving to be a bright spot.

Well, relatively speaking. As it did for Amazon’s rivals in digital advertising, the company’s ad revenue growth slowed from 32% in the fourth quarter to 18% before the recent slowdown began, Amazon reported Thursday. But it’s still hitting the highway at a good pace compared to some other digital advertising companies. Advertising revenue at Meta Platform Inc., most notably, fell from 20% in the fourth quarter to minus 1.5% in the second quarter. Even Google’s ad revenue slowed to 11.6% from 32.5% in the fourth quarter.

And compared to the rest of Amazon’s business — other than Amazon Web Services, investors’ favorite business — advertising is a star. After all, online sales fell 4% in the quarter. In addition, given the high-profit nature of advertising, business is now a significant contributor to a company’s bottom line. AWS’s $5.7 billion operating profit offset Amazon’s $2.4 billion loss in the rest. But without advertising, the rest of Amazon would have lost more money.

Having said all that, it’s important to acknowledge that much remains unknown about Amazon’s advertising business, which makes it difficult to assess its growth prospects and actual profitability. Investors deserve more clarity on this.

For example, how much of the $8.7 billion in advertising in the second quarter was driven by merchants who sell their goods on Amazon’s marketplace and want to ensure prime placement? It is not clear whether these traders do so willingly or happily. A 2020 Congressional Report on Competition in Digital Markets provided evidence that “Amazon may require sellers to purchase its advertising services as a condition of making sales on the Platform.” (An Amazon spokesperson denied that merchants selling on Amazon’s Marketplace were required to purchase ads.)

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One possible reason investors are concerned is that any kind of regulatory action against such practices could squeeze Amazon’s advertising revenue. Another, related point: Ads on Amazon have become so crowded in search results that the company runs the risk of alienating shoppers when looking for real results.

Still, there’s no doubt that Amazon is an increasingly successful advertising platform. People in the advertising industry say that Amazon is seen as an effective place for brands to buy ads. Its data on what consumers are buying means that advertisers can target their ads at the customers they’re trying to reach. Other retailers are building similar advertising businesses with some success. Indeed, GroupM, the world’s largest media buyer, says its largest packaged-goods clients increased their spending on “retail media” — Amazon and the websites of Walmart Inc. and Target Corp. — to 12% of their total US advertising. . Spending in 2021 from 3% in 2019.

In addition, Amazon is selling not only on ads on its Marketplace, but also on other properties, such as its freevy video streaming service and on its Twitch gaming site. And it sells ads on websites it doesn’t own across the Internet, just like Google does. Unlike Google, however, Amazon doesn’t provide any details about how much revenue comes from which bucket.

It’s important for understanding the profitability of revenue — and even how much revenue Amazon actually keeps. When Google or Amazon sells ads on properties it doesn’t own, it only gets a cut in revenue. Google reveals what it shares with those other assets. It’s unclear from Amazon’s disclosure what it’s reporting exactly — net or gross ad revenue. One more thing: Selling ads on the freeway may not be as profitable as selling ads on Amazon’s marketplace, given the cost of programming or licensing programming for the service. So how much advertising revenue is Freevy contributing to the total?

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It’s time to stop talking about the digital advertising market, as it is dominated by two companies, Alphabet Inc. and Meta. Amazon’s share of the US digital advertising market is expected to reach 12.6% this year, Insider Intelligence estimates, up from 7.7% in 2019. Meta and Google, which had a combined 55.2% market share in 2019, will take 50.5 this year. , And given that Meta’s ad revenue is likely to decline over the next 12 months, Amazon’s share is likely to increase through this slowdown. While this may be encouraging for investors, it’s time for Amazon to provide clear disclosure about the nature of its advertising business.

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