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Amazon's Ad Business is a Cash Cow, and It's Udderly Fantastic

Amazon's advertising business has become a force to be reckoned with in the industry, thanks in part to its vast customer data. In fact, the company has so much data that some have joked that it has more information than the National Security Agency (NSA) - but let's not tell Edward Snowden!

Amazon is one of the world's largest companies, with operations spanning across various industries. One of its most promising business segments is advertising. The company's advertising services division generated $9.51 billion in revenue in the first quarter of 2023, up from $7.87 billion in the same period in the previous year. This represents a 23% gain, excluding foreign currency.

The growth in Amazon's advertising business can be attributed to its ongoing machine-learning investments, which help customers see relevant information when they engage with the company. This delivers unusually strong results for brands, as CEO Andy Jassy noted in the company's announcement.

However, Amazon is not alone in the advertising industry. Its biggest rivals are Google and Facebook, which together dominate the digital advertising market. But as Google prepares to sunset third-party cookies next year, Amazon sees an opportunity to gain market share by using its data clean room Amazon Marketing Cloud to help advertisers target their desired audiences.

To further solidify its position, Amazon recently unveiled machine learning updates to its demand-side platform (DSP), an ad-buying tool available to third parties that competes with Google's Display & Video 360 and The Trade Desk. According to the DSP's representatives, Amazon has spent years developing these capabilities to help advertisers target desired audiences using the few remaining signals that will be left in the wake of third-party cookies.

Amazon's machine learning updates to its DSP also enable advertisers to model their budget distribution, ensuring their ad campaigns stay on budget for the ideal amount of time. In internal tests involving 140,000 advertiser campaigns, advertisers using these updates experienced a 12.6% increase in click-through rate, a 34.1% increase in return on ad spend, and a 24.7% decrease in cost per click.

These results demonstrate Amazon's commitment to delivering value to its advertising partners. In an industry that has become increasingly crowded, producing incremental value and solving for problems is crucial.

However, some experts have raised concerns about the quality and measurement of Amazon's additional reach. Robert Webster, global svp at marketing consulting service CvE, told Digiday a few days ago that there are questions about where the additional reach is coming from and how to validate its quality and measurement.

Amazon's advertising business is divided into two main segments: Amazon Advertising and Amazon Web Services (AWS). Amazon Advertising includes advertising services, such as sponsored products, sponsored brands, and display ads, that allow brands to reach customers on Amazon's platform. AWS includes cloud computing services that help businesses scale their operations.

Amazon's advertising business has seen robust growth in recent years, driven by its ability to offer advertisers access to its vast customer base. As of December 2022, Amazon had over 200 million Prime members worldwide, and its platform accounted for 38% of all e-commerce sales in the United States.

Amazon's advertising services are particularly appealing to brands looking to increase their visibility and sales on the platform. For example, sponsored products are displayed at the top of Amazon search results, making them more visible to shoppers. Sponsored brands, on the other hand, allow advertisers to promote a selection of their products in a single ad unit In addition to these services, Amazon also offers display ads that appear on Amazon's websites and mobile apps, as well as programmatic advertising through its demand-side platform (DSP). The DSP allows advertisers to reach Amazon's customers across the web, as well as on other publishers' websites and mobile apps.

Amazon's advertising business has several advantages over its rivals. For one, it has vast data on its customers, including their search and purchase history, which allows it to deliver highly targeted ads. In addition, Amazon's platform is an e-commerce marketplace, meaning that customers are already in a shopping mindset when they visit the site, making them more likely to make a purchase.

Another advantage of Amazon's advertising business is that it is integrated with its e-commerce operations, which allows it to offer advertisers unique insights into customer behavior. For example, advertisers can see which products are selling well and adjust their campaigns accordingly.

Despite these advantages, Amazon still faces significant competition in the advertising industry. Google and Facebook together account for around 60% of the digital advertising market, while Amazon's share is estimated to be around 10%. However, as Google prepares to sunset third-party cookies next year, Amazon sees an opportunity to gain market share by using its data clean room Amazon Marketing Cloud to help advertisers target their desired audiences.

The demand-side platform (DSP) is a key component of Amazon's advertising business. The DSP allows advertisers to buy display and video ads on Amazon and other websites and mobile apps. It uses machine learning to help advertisers target their desired audiences and optimize their ad campaigns.

Amazon's DSP is particularly appealing to advertisers because it allows them to access Amazon's vast customer data. Advertisers can use this data to target specific customer segments based on factors such as their purchase history, search history, and demographic information.

Amazon's DSP also offers advanced targeting options, such as lookalike targeting, which allows advertisers to target customers who are similar to their existing customers. In addition, it offers retargeting options that allow advertisers to target customers who have previously interacted with their brand.

Amazon's DSP also offers real-time bidding, which allows advertisers to bid on ad inventory in real time. This ensures that advertisers can reach their desired audience at the right time and at the right price.

Overall, Amazon's DSP is a powerful tool for advertisers looking to reach customers across the web. Its ability to access Amazon's vast customer data and its advanced targeting and optimization capabilities make it a compelling option for advertisers.

In addition to its DSP, Amazon offers several other advertising services that allow brands to reach customers on its platform. These services include sponsored products, sponsored brands, and display ads.

Sponsored products are displayed at the top of Amazon search results and in other prominent locations on the site. They are designed to increase visibility and sales for individual products. Advertisers pay only when a customer clicks on their ad.

Sponsored brands, on the other hand, allow advertisers to promote a selection of their products in a single ad unit. These ads are displayed at the top of search results and on other prominent locations on the site. They are designed to increase visibility and sales for a brand as a whole. Advertisers pay only when a customer clicks on their ad.

Amazon's display ads are banner ads that appear on Amazon's websites and mobile apps. They are designed to increase brand awareness and drive traffic to a brand's website. Advertisers can target specific customer segments based on factors such as their search history and demographic information.

Amazon's advertising business has several opportunities for growth. One of the most promising areas is programmatic advertising which is expected to grow rapidly in the coming years. Programmatic advertising involves the automated buying and selling of advertising inventory, and it is becoming an increasingly popular way for advertisers to reach customers across the web.

Amazon's DSP is well-positioned to take advantage of the growth in programmatic advertising. Its advanced targeting and optimization capabilities, combined with its access to Amazon's vast customer data, make it a compelling option for advertisers looking to buy programmatic ads.

In addition to programmatic advertising, Amazon's advertising business has opportunities for growth in other areas as well. For example, the company could expand its advertising services to other countries, or it could offer new types of advertising services to its existing customers.

However, Amazon's advertising business also faces several challenges. One of the biggest challenges is competition from Google and Facebook, which together dominate the digital advertising market. Amazon's share of the market is relatively small, and it will need to continue to innovate and improve its offerings to compete with these giants.

Another challenge facing Amazon's advertising business is the upcoming changes to third-party cookies. As Google prepares to sunset third-party cookies next year, Amazon will need to find new ways to target customers and deliver relevant ads. The company's machine learning capabilities and access to first-party data could give it an advantage in this area, but it will still need to navigate the changing landscape of digital advertising.

Finally, Amazon's advertising business faces internal challenges as well. The company has been experiencing a spate of mass layoffs in recent months, including in its advertising unit. These layoffs are part of CEO Andy Jassy's effort to cut costs across Amazon's businesses. However, they could also impact the company's ability to innovate and grow its advertising business in the future.

Amazon's advertising business is one of the company's most promising segments. With revenues of $9.51 billion in the first quarter of 2023, the business is growing rapidly and has several opportunities for further growth. However, the advertising industry is highly competitive, and Amazon will need to continue to innovate and improve its offerings to compete with rivals like Google and Facebook.

In addition, the upcoming changes to third-party cookies present a significant challenge for Amazon's advertising business. The company will need to find new ways to target customers and deliver relevant ads in a post-cookie world.

Despite these challenges, Amazon's advertising business is well-positioned to continue growing in the coming years. Its advanced targeting and optimization capabilities and its access to Amazon's vast customer data and its access to Amazon's vast customer data make it a compelling option for advertisers looking to reach customers across the web.

Pesach Lattin
Editor-in-Chief, ADOTAT

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