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Amazon.com (NASDAQ: AMZN) has turned its advertising business from nothing to something in a relatively short time. It is now the third most important digital advertising platform behind Facebook (NASDAQ: FB) and Alphabet& # 39; s (NASDAQ: GOOG) (NASDAQ: GOOGL), and could become the most profitable business of the giant e-commerce.
Although the advertising sector is its fastest-growing segment, with sales up 132% in the first quarter and 129% in the second quarter, reaching $ 2.2 billion, Amazon risks negative reaction of consumers.
Image source: Amazon.com.
Use search to popularize ads
Amazon is where people go looking for things. About 55% of consumers begin their search for a product on Amazon before consulting other websites. Last Christmas, more than three quarters of online shoppers said that they would buy most of their holiday shopping online on Amazon. Forrester Research says that Amazon's search capabilities have become so good that they are reducing Google's share of search ad revenue and will continue to erode it in the future.
eMarketer estimates that Amazon.com currently holds 4% of all digital ad spend, well behind Facebook (20%) and Google (37%), but expects Amazon's share to reach 7% of all digital ad spend. by 2020. This growth will be at the expense of Google, which will see its share fall to 35%.
In addition, while Amazon wins on Google and Facebook in advertising dollars, they have little impact on e-commerce. Thus, Amazon maintains its grip on online sales and uses this leverage to encroach on the advertising revenues of its competitors.
Earlier this year, Amazon's chief financial officer Brian Olsavsky told analysts at the earnings conference call: "Advertising continues to be a good thing, both from a product and a point of view. financial view.
Not everything that it seems
However, much of Amazon's advertising revenue growth actually results from an accounting change that has forced Amazon to rank certain accounting services in revenue rather than in cost of sales, as before. The result was an increase in service sales from these sources of $ 1.2 billion this year.
While this means that growth is not as impressive as it appears, Amazon is still recording significant gains and, according to Recode, is using its new capabilities to pack its web pages with advertisements. Users are forced to browse sponsored spots and promotional placements from Amazon before they can finally achieve the organic results they are looking for.
Recode indicates that the ads "occupy the entire screen above the fold – everything is visible before scrolling".
Too much good
While Amazon argues that ads create "value for customers by helping them discover new brands and new products," as beauty, value can be in the eye of the viewer. Consumers may not appreciate the help provided by Amazon.
The New York Times underlines Amazon's video game streaming service, Twitch, prompted players to announce that core members would no longer benefit from an ad-free experience unless paying $ 8.99 per month to access Twitch Turbo, the premium offer of the service.
Now, he creates so many ads in other ad-free spaces to generate even more revenue. Beyond Twitch, Amazon has introduced advertising on other properties (such as IMDb) and plans to launch an ad-supported service for Fire TV owners.
Push the envelope too far
Amazon could eventually face the law of diminishing returns as consumers are reluctant to be flooded with advertising. Previously, he decided not to allow ads on his voice assistant Alexa, saying that it would spoil the customer experience and said earlier this year that he "always balanced the utility of advertising and tried not to disrupt it. go down to the client's side, "suggesting that he knows the limits.
It does not seem that we are close and the acceleration of growth means that investors should not expect to see a slowdown anytime soon, but Amazon should still have a similar moment to that of the company. increasing ubiquity of advertisements. New spaces can cause a quick return of consumers.
John Mackey, CEO of Whole Foods Market, an affiliate of Amazon, is a board member of The Motley Fool. Suzanne Frey, executive at Alphabet, is a board member of The Motley Fool. Rich Duprey has no position in the mentioned actions. The Motley Fool owns shares and recommends Alphabet (A Shares), Alphabet (C Shares), Amazon and Facebook. Motley Fool has a disclosure policy.
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