In today's Finshots we see how Amazon is slowly turning into an advertising giant

The Story

Before we begin, let’s try a small exercise.

Fire up the Amazon app on your phone or head over to their website and search for say… “Perfumes”. At once Amazon’s algorithms will swing into action and you’ll see a page appear in front of you. No surprises here, the results will be in line with your expectations — a bunch of perfumes — arranged neatly in a list, nothing out of the ordinary. Except, if you look closely, you’d actually be looking at Amazon’s most inconspicuous revenue stream.

Advertising!

There it is, hiding in plain sight while you buy groceries and books.

When you search for anything on Amazon, the sorting filter is set to show you “featured” items, by default. This is Amazon’s way of showing you a list of ‘curated products’, that they feel will be best suited to your cause. Or at least, that’s what they claim. But right at the very top of every page, you’ll often see results marked as “Sponsored ⓘ”. They only feature at the top because some sellers decided to pay Amazon an advertising fee to push their products to the top. And turns out, Amazon is remarkably efficient on this front as their latest financial statements reveal.

The company earned $9.7 billion in advertising revenues in the fourth quarter of 2021, i.e. a 32% year-on-year gain. For the whole of last year, Amazon made some $31 billion in ad revenues. This is bigger than the ad revenues of YouTube. It is bigger than the ad revenues of the entire global newspaper industry. It is big even for Amazon’s high standards. So big in fact, that until now this seemingly unassuming source of revenue was tucked inside the “other” segment in its financial statements. Well, no more. Amazon is more than happy to let the world know, its advertising game has truly come of age.

And in some ways, this was long overdue perhaps.

Amazon is the biggest store in the world. ~200 million people visit the website every month in the US alone. And the company for one keeps a record of every single visit and every single search committed on its platform. In summary, Amazon’s algorithms know what people search, what they buy, what they leave behind in their cart, their wishlist, everything.

For ad agencies and brands this is an all you can eat buffet. Want to get your product featured further up the page? Pay for a sponsored banner. Want to show off your product to the masses? Pay amazon to run a short video on the home page. Want something more? Well, if you buy ad space on Amazon, you’ll get yourself a customer that is highly inclined to make a purchase. This is the most valuable kind of customer.

And as some studies show, nearly three in four consumers were inclined to start their online search for a product on Amazon. In that sense, Amazon ads give advertisers more bang for their buck when compare to ads placed on social media or YouTube even. And they aren’t in your face either. Oftentimes, you may miss them entirely because you didn’t see the sponsored tag.

Next, Amazon’s ad business has largely been unaffected by Apple’s privacy tweaks. The tweaks gutted Facebook and Google’s ad business — a business powered by sophisticated behavioural data. And once Apple cut its cord, they saw their ad revenues tank. Amazon on the other hand relies predominantly on data captured on its own app and website. Something that isn’t affected by what Apple does to its operating system.

Also, the Amazon ad engine is fairly low key. It uses keyword-targeted ads that let advertisers promote products attached to a set of keywords. Meaning a perfume maker will pay for its product to be displayed when consumers search “perfume” or “deodorant”. That’s about it!

Meanwhile, as overall ad spending has increased, Amazon has also started creeping in sponsored products under its recommended section like “Products related to this item” or “More items to explore”. Nudging users some more to check out these sponsored products.

Ad revenues now make up Amazon’s third-largest source of revenues trailing behind online sales and AWS (Amazon’s cloud business). Its ad business now generates more annual revenues than its physical stores, Amazon fresh etc ($17 billion) and about the same amount as its subscription services ($31 billion).

So yeah, Amazon probably isn’t the first company you think of when it comes to advertising. But the Everything Store is going gangbuster with the help of humble ads.

Until then...

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