Amazon.com, Inc. (NASDAQ:AMZN) is known as the 800 pound gorilla in the e-Commerce space. However, Amazon’s little known advertising business is slowly and steadily getting out of the cage. Amazon has vast amounts of consumer data which it can utilize to rapidly grow its advertising business.
Online advertising business
Amazon.com, Inc. (NASDAQ:AMZN) owns a number of high traffic websites and the company is just starting to monetize these by placing advertisements on these properties. However, the tight-lipped Amazon doesn’t break-out the revenue it earns from advertising operations. In 2012, the advertising revenue which is reported in the Other Revenues line item, contributed only 4%, or $2.5 billion, to Amazon’s total revenue of $61 billion. Amazon’s cloud computing business, or AWS, makes up the bulk of that $2.5 billion and the rest comes from advertising and co-branded credit cards.
Amazon has evolved into a “commercial search engine” and consistently ranks as one of the top 10 search properties in the world, according to data from comScore. As a result, a majority of Amazon’s advertising revenue is coming in from the ad placements near customer search results. Amazon is likely using keyword and product-based search results, in line with search giant Google Inc (NASDAQ:GOOG), and it also has huge amount of data about the consumer’s historical shopping data, and prior purchases to more accurately enhance targeting.
In addition, Amazon.com, Inc. (NASDAQ:AMZN) earns a lot of revenue from display ads on its third-party network. The company is gaining momentum in establishing itself as a viable platform for serving ads on third-party websites. Amazon earned roughly $610 million in total advertising revenue in 2012, which represented a growth of 45% from the previous year, according to estimates from eMarketer.
Advertising on Amazon’s sites and mobile
Amazon.com, Inc. (NASDAQ:AMZN) has number of popular consumer Internet properties in which it enables advertisers to place display ads based on the observed shopping behaviors of millions of customers. On Amazon.com alone, there is an active customer audience of more than 209 million. Also, Amazon owns Quidsi, which is a rapidly growing e-Commerce company with popular sites like Diapers.com, Soap.com etc. Amazon also owns the popular entertainment information site, IMDB, which routinely gets more than 160 million visitors.
The company facilitates various types of ads like coupon ads, customer review ads, and e-commerce ads on its properties. Amazon started rolling out video ads on its entertainment information platform, IMDB, and that too using a skippable ad format very similar to Google Inc (NASDAQ:GOOG)’s YouTube which terms it the “TrueView Format.”
Unlike numerous other companies which have struggled to keep up with the consumer’s shift to mobile, Amazon.com, Inc. (NASDAQ:AMZN) is positioning itself to have stellar offerings for mobile ads as well. Amazon is trying to compete with advertising giants Facebook Inc (NASDAQ:FB) and Google for mobile dollars as well. Just like Facebook and Google, Amazon has a big audience which is accessing its sites from various mobile devices, and many of these customers are making retail purchases as well as acquiring other content like music and books from its platform. Amazon’s own tablet devices are also showing ads, which leads to incremental revenue for Amazon.
Third-party network
The big opportunity for Amazon.com, Inc. (NASDAQ:AMZN) lies in its ability to expand its third-party advertising network. The firm’s third-party advertising enables other high traffic and high quality websites to show ads to earn revenue. Amazon also acquires a lot of inventory from online ad exchanges and makes bids using its years of consumer data and analytics for enhanced targeting capabilities.
In addition to desktop, Amazon operates a Mobile Ad Network which allows advertisers to target customers of Amazon on various third-party apps and exchanges across Android, iOS, and Kindle Fire. Amazon provides the same tools and personalization capabilities for its own sites to leverage on its Mobile Ad Network.
The revenue from advertising are small for now, they can grow substantially from current levels in the future. According to eMarketer, Amazon doesn’t pay a lot of Traffic Acquisition Costs (TAC) to partner sites, unlike other competing firms like Google.
Growth in online advertising
As more and more marketers move online from traditional advertising outlets like Newspapers and Magazines, the leading Internet firms will be major beneficiaries of this trend. According to ZenithOptimedia, total Internet advertising will grow from $88.5 billion in 2012 to $132.4 billion by 2015. And display advertising, which made up about 38% of online advertising in 2012, is expected to increase to 43% of total Internet advertising in 2015.
| Exhibit: Growth in Online Advertising Markets (in USD billions) | |||||
|---|---|---|---|---|---|
| 2011 | 2012 | 2013E | 2014E | 2015E | |
| Display | 28.2 | 33.2 | 39.8 | 47.7 | 57.2 |
| Classified | 11.3 | 12.1 | 12.8 | 13.4 | 14.1 |
| Paid search | 37.4 | 43.2 | 48.8 | 55.0 | 61.1 |
| Total | 76.9 | 88.6 | 101.5 | 116.1 | 132.4 |
| Source: ZenithOptimedia | |||||
As a result, well placed firms like Facebook, Google, and Amazon can all gain a lot of ground at the expense of traditional print media. And all these firms are improving their monetization on mobile as well. Facebook Inc (NASDAQ:FB) now has a mobile run-rate of $1.5 billion, and Google laid out a mobile run-rate of more than $8 billion in 3Q12, which has likely grown higher. And Amazon’s mobile ads placements on its websites and on third-party sites gives the company yet another opportunity to generate higher margin revenue compared to its e-Commerce business which has razor thin margins.
Amazon is expected to grow its advertising revenue rapidly from current levels as it has an edge over other rivals who lack purchasing data from real consumers. There has been a large range of estimates regarding the growth of Amazon’s advertising business among investors and analysts alike. eMarketer is expecting Amazon’s ad revenue after paying out TAC to increase to $835 million in 2013. This projection seems a little conservative, and might end up being much higher than the estimate by the research firm, eMarketer.
Going forward
While Amazon.com, Inc. (NASDAQ:AMZN) is still in the early stages of being a major advertising outlet, the company’s growth potential in the space is very big. Even though advertising makes up a very small portion of Amazon’s total revenue, the business commands much higher operating margins as evidenced from various advertising-based firms like Google, Baidu.com, Inc. (ADR) (NASDAQ:BIDU), Facebook, etc. Amazon can monetize its large customer-base frequenting its massive platform by placing ads based on data and analytics and earn more revenue, which will have a positive impact on its bottom line relative to its core retail operations.
The article Amazon’s Advertising Fortunes Can Surge originally appeared on Fool.com and is written by Ishfaque Faruk.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Facebook, and Google. The Motley Fool owns shares of Amazon.com, Facebook, and Google. Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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