Thursday, January 18, 2018

Platforms: Amazon Could Make Billions From the Ad Business (AMZN)

From the advertising mavens at The Drum, a deep dive:

The stage is set for Amazon but is building an ad business a big enough priority?
Any predictions worth their salt for 2018 have zeroed in on the inevitable rise of Amazon ‘s ad business. Sorrell called out Amazon as the one to watch over a year ago. Whilst the duopoly of Google and Facebook continues to show exponential growth (in spite of the continued barrage of brand safety criticism and Facebook’s unexpected algorithm change) Amazon’s year-on-year upswing in ad revenue combined with the hyper-attention on voice and smart speakers has led to all marketer’s eyes locking in on what the Seattle-headquartered company does next.

Amazon doesn’t break out its advertising revenue in its earnings report but the “other” line for Q3 2017 reveals a business likely in excess of $1bn. One source quotes smart home speaker sales in the US tripling to 25 million in 2017 with 11 million sold in Q4. Another says that sales of smart home speakers were up 103% year on year. Either way, the growth is exponential. Whilst market share figures are hard to come by, Amazon is rumoured to account for 70-75% of that market in the US.

Before I go any further, a few more numbers for context. Data to understand how Amazon’s ad revenue breaks down is nigh impossible to come by, but it’s fair to say that today this dominated by display advertising and more latterly programmatic with the launch of X. There is therefore no significant revenue coming from search today, a landscape that Google still dominates with 65% share in the US and over 90% in most of Europe. In terms of revenue, however, Google takes almost 80% of all search ad revenue, so why then is everyone so excited about voice search and Amazon specifically?

The technology, and therefore consumer behaviour, is pivoting again. There was a time back in the early 2000’s, when search behaviour enjoyed a different question based format (remember Ask Jeeves) and before Adwords took its dominant position, the early movers were businesses now largely forgotten, namely Overture and E-spotting. Google quickly squashed them leading one to consider whether it is best to be a first mover or launch a superior product soon afterwards as a second mover. Many argue that Google Home’s smart speaker is a superior product but importantly Amazon got there first with Alexa. History, especially that of the mobile, is peppered with examples of devices and technologies being pioneered by one player (e.g. Nokia, Microsoft, Palm etc) and then these businesses fast losing their dominance to a product with superior user experience (e.g. Apple, Samsung).

According to Google’s own forecasts, by 2020, voice search will account for 50% of all searches globally. Google has rapidly pursued Amazon with its Home and Mini products enjoys a decade lead on Amazon in terms of understanding how to build an ad business and engage with brands and agencies. Conversely, Amazon provides direct access to consumer product and as a result has established relationships with manufacturers and retailers....