Amazon Striving To Conquer Google’s Territory (NASDAQ:AMZN)

The competitive landscape of the digital advertising industry has increasingly intensified, not least due to the rise of Amazon (NASDAQ:AMZN) advertising. In Q3 2022, Amazon’s advertising revenue grew 25% year-over-year, while most competitors witnessed slowing advertising revenue growth.

Between 2019 and 2021, Amazon’s advertising market share grew from 7.8% to 11.6%, while Google’s (GOOG) (GOOGL) market share eroded from 31.6% to approximately 28.6%. Moreover, the market share for other digital advertising platforms outside of the advertising triopoly (Google, Facebook (META) and Amazon) shrank by 1% from 37% to 36% over the same period. Amazon’s persistent and effective innovation in its advertising solutions emboldens its ability to continue acquiring market share from incumbents like Google.

Amazon’s success with Sponsored Display ads

In 2019, Amazon launched sponsored display ads; a “self-service advertising solution that helps advertisers reach relevant audiences across the shopper journey, with ad placements that appear on and off Amazon”. Sponsored Display ads “use Amazon’s rich shopping and contextual signals to help create brand awareness, consideration, purchase, or even loyalty with relevant audiences”. These ads appear both on the Amazon home page/ product detail pages, as well as outside Amazon on streaming service Twitch and other third-party websites.

Sponsored Display ads allow advertisers to re-engage visitors that have viewed their product pages, reach consumers that have viewed competitors’ similar product pages, as well as reach new audiences altogether offsite. For example, someone browsing on a third-party travelling website could be presented with an Amazon ad displaying essential travelling equipment from a sellers’ product catalogue, driving traffic from new sources and potentially creating new customers. In fact, Amazon proclaims that “advertisers who use Sponsored Display audiences on average see up to 82% of their sales driven by new-to-brand customers”.

While sponsored products and sponsored brand ads limited advertising potential to Amazon’s marketplace and web visitors’ search queries, Sponsored Display ads use advertising space on third-party websites to generate new traffic and sales, and moderate the increasingly intensifying competitive landscape within the Amazon marketplace. Amazon was already offering access to 2.4 billion monthly site visitors, this solution offers access beyond the in-house marketplace, capitalizing on third-party websites’ visitors and augmenting Return on Ad Spend (ROAS) through effective contextualized targeting. In fact, according to a JungleScout study, Sponsored Display ads witnessed a 68% increase in ROAS in 2021, while Sponsored Product and Sponsored Brand ads saw declines.

Furthermore, the e-commerce giant not only has access to consumers’ shopping activities and browsing behaviors, but it also offers multiple other services that generate additional lucrative first-party data for advanced customer and audience segmentation, primarily its video-streaming services. Amazon has access to what prime members are viewing on Prime Video, and what content consumers generally are streaming on its ad-supported video streaming service ‘FreeVee’, what they are browsing for on IMDb, as well as what they are streaming on third-party website Twitch. This content consumption data is incorporated into determining its audience segmentations, such as by lifestyle (e.g. “foodies”, “sports enthusiasts”, “tech enthusiasts”), to better inform Amazon’s targeted advertising efforts. Essentially, Amazon is leveraging its multi-service platform, coupled with a growing third-party network, to advance the edge it holds in the advertising industry, and better compete with Google’s cross-platform solutions.

Amazon’s Sponsored Display ads directly challenge Google

Cross-platform advertising is a key element of Google’s own advertising solutions. For instance, it uses search activity and web browsing data to place relevant ads in YouTube, and holds valuable content-consumption data to aid its targeted advertising efforts across the platform, including Google Discovery feeds. Google’s exclusive access to search activity/ web browsing data on the world’s most popular search engine is a key element of its moat to offer more valuable advertising solutions over its rivals. However, Amazon’s advancements into third-party website data access undermines Google’s competitive advantages.

Amazon’s own popular search-engine for shopping activities already yielded itself access to valuable consumer behavior trends to inform its advertising strategies. Now, Amazon’s growing network of partnerships with third parties, as part of its Sponsored Display solution, entails access to web activity data from third-party websites to inform its shopping and contextual signals and display the most relevant ads on these offsite locations.

Moreover, access to third-party web activity data also enhances the e-commerce giant’s ability to display more relevant product ads to its own web visitors, such as on the Amazon home page, based on their web activity offsite, essentially feeding into a strategy to make the Amazon platform stickier by better serving shoppers’ needs. For example, extending the example used earlier, if Amazon knows a particular web visitor had previously been browsing on a third-party travelling website, it could re-target the visitor with travel equipment on the Amazon home page, particularly if the initial Sponsored Display ad on the travelling website did not result in a click -through. These re-targeting chances allow for more opportunities to build impressions and augment chances of sales conversions. The combination of in-house search engine and third-party web activity data further emboldens Amazon’s advertising prowess.

While the use of third-party data to deliver better advertising solutions is nothing new in the advertising industry, Amazon has the ability to do it better than rivals like Google and Facebook, chiefly due to the fact that web visitors on amazon.com mainly come with the intention to shop, in contrary to rivals’ platforms. Therefore, it is better positioned to use third-party data (coupled with in-house search engine data) to drive sales conversions.

Furthermore, the use of streaming consumption data from Prime Video, FreeVee and Twitch to inform targeted advertising efforts directly competes with Google’s ability to use YouTube streaming data to deliver effective advertising solutions. Google has been striving to advance YouTube’s shopping features, such as through the introduction of the YouTube Shopping tab and live stream shopping, with the aim of attracting more purchase-minded web visitors, conducive to more effective advertising solutions, to better compete against Amazon. YouTube is indeed making some progress in encouraging online shoppers to search for products on its own platform (though still well behind Amazon).

Nevertheless, the growing number YouTube Premium (ad-free experience) subscribers narrows the total addressable audience for advertisements. While these users generate subscription revenue for Google, their search activity and streaming data can’t be used for targeted advertising within YouTube. This undermines YouTube’s ability to promote products and encourage shopping activity to Premium users within the platform.

While Amazon is also not able to advertise products to Prime Video streamers in-stream, it is still able to leverage streamers’ video consumption data to inform Sponsored Display advertising strategies, and target them the next time they visit the Amazon home screen/ shopping pages of the website. Hence, Amazon is able to both charge membership fees to Prime Subscribers while also advertising to them on the shopping pages of its website, whereas YouTube faces a trade-off between premium subscription revenue and advertising revenue on the platform. Therefore, Amazon’s business model offers dual revenue-generation opportunities.

YouTube could still use the search activity and streaming data to target users on other Google platform locations, such as Google Discovery Feeds and Gmail promotions, to target Premium subscribers with relevant advertisements, as well as encourage YouTube Shopping engagement. However, given that Google Discovery Feeds and Gmail are not places where visitors primarily come to shop, advertisements on these locations are unlikely to be as effective as those that appear on Amazon’s home page/ shopping pages.

Cross-selling with other e-commerce solutions

A key strategy that Amazon uses to promote its advertising solutions to sellers is cross-selling it with other essential e-commerce solutions, particularly its fulfilment services. Moreover, Amazon has introduced Perfect Launch, which combines “five selling programs-Brand Registry, A+ Content, Fulfillment by Amazon, Automated Pricing, and Advertising”, designed to help sellers maximize sales on the Amazon marketplace, and includes incentives worth up to $50,000 for sellers that employ these e-commerce solutions in aggregation.

Amazon’s industry-leading fulfillment and logistics capabilities are key elements of its e-commerce moat, which distinguish itself from competitors and new entrants in the industry. Hence, Amazon is prudently leveraging its fulfillment prowess to cross-sell other services like advertising solutions. In fact, the e-commerce giant proclaims that “on average, sellers achieving Perfect Launch generate 6.3x more first-year revenue than other sellers”. Amazon’s ability to aggregate advertising solutions with other e-commerce essentials helps accelerate advertising revenue growth, as sellers seek to extract as much value as they can from Amazon’s selling programs and offers.

Competitors like Google are unable to offer such aggregated e-commerce solutions to boost advertising revenue, notably due to the absence of a comparative fulfillment network. Google has been striving to accelerate its e-commerce initiatives by partnering with Shopify (SHOP), particularly to advance its YouTube live-stream shopping features, and incorporating Shopify’s inventory management services. Though with regards to fulfillment, Shopify is still in the midst of building out its own fulfillment network, undermining the ability of the Google-Shopify partnership to effectively challenge Amazon. While Google could partner with other third-parties to catch up and challenge Amazon’s fulfillment prowess, the lack of in-house e-commerce solutions undermines its ability to effectively cross-sell and accelerate advertising revenue growth.

Amazon is well-aware of competitors’ short-comings when it comes to offering the full suite of essential e-commerce solutions to enable merchants to succeed, and in fact has exploited this competitive advantage through the introduction of ‘Buy with Prime‘ earlier this year. ‘Buy with Prime’ started off as offering Prime fulfillment services to non-Amazon D2C sellers, allowing digital merchants to ship products to customers using the same speedy fulfillment service available to Amazon sellers. The tech giant then extended ‘Buy with Prime’ benefits to include advertising solutions, offering D2C merchants access to Amazon’s lucrative Prime subscriber base and recurring stream of purchase-minded web visitors, including the ability to run a store on amazon.com that showcases their product catalogues. This presents a direct challenge to Google’s efforts to induce D2C merchants to use the YouTube sales channel and subsequent advertising solutions. Amazon’s ‘Buy with Prime’ endeavor astutely extends its cross-selling strategy beyond marketplace sellers to capitalize on D2C e-commerce activity and further accelerate advertising revenue growth.

Counter factors

While Amazon has been successfully innovating new advertising solutions like Sponsored Display ads, as well as creative cross-selling strategies through ‘Perfect Launch’ and ‘Buy with Prime’, the increasing demand for its advertising solutions could indeed intensify auction bidding processes, resulting in rising Cost-Per-Click [CPC] rates. Rising CPC rates require advertisers to constantly expand their advertising budgets and result in the dilution of ROAS, undermining the appeal of its advertising solutions overtime. According to a 2021 JungleScout study, 46% found it challenging to manage their advertising budgets. Keep in mind that this was before the launch of ‘Buy with Prime’ this year, which extended advertising solutions to non-Amazon sellers, further intensifying auction bids for ad spaces. Hence, a persistent rise in Amazon advertising costs could indeed slow down advertising revenue growth overtime.

Furthermore, despite Amazon’s advertising innovations, sellers using its advertising solutions still face the risk of consumers easily comparing sellers’ products with those of competitors, and potentially losing sales to competitor brands. In fact, even if a seller is able to successfully bring consumers to its product detail page through the use of Sponsored Product, Brand or Display ads, page visitors can find competitors’ products right below the seller’s own product in the ‘products related to this item’ section of the page. This is intended to ease shoppers’ ability to compare products and make well-informed purchase decisions, as Amazon is primarily and famously focused on enhancing the customer experience, at the expense of its sellers potentially losing sales to competitors on the platform.

While merchants also have the option to run their own separate storefronts on amazon.com, with certain web pages specifically dedicated to a particular brand’s products only, they must still use Sponsored Brand ads to direct web visitors towards their storefronts. While Sponsored Brand ads can grant sellers the top spots on search result pages, visitors can still find competitors’ products right below the ads as shoppers seek to compare products, undermining advertisers’ ability to stand out. Therefore, the inevitable competitive landscape of the Amazon platform may undermine the appeal of its advertising solutions relative to competitors’ sales channels that offer better brand differentiation opportunities, such as YouTube influencers promoting products through live-stream shopping events.

Summary

Amazon’s Sponsored Display advertising solution seeks to leverage its first-party data from both shopping activities and streaming data, as well as third-party web activity data, enhancing its targeted advertising efforts. This solution directly challenges Google’s cross-platform advertising solutions, augmented by a superior ability to attract purchase-minded web visitors. The introduction of ‘Perfect Launch’ offers compelling cross-selling opportunities and the launch of ‘Buy with Prime’ creates a new revenue source by attracting ad dollars from D2C sellers, away from competitors like Google. Despite intensifying auction bids for ad solutions and brand differentiation limitations, Amazon is strongly positioned to continue taking advertising market share amid constant advancements and innovations in its advertising solutions.

That being said, Amazon is a large tech giant with multiple business divisions and revenue sources. Any buying and selling decisions should take into consideration performances of all business divisions together. As this article solely focuses on the advertising revenue segment, a neutral ‘hold’ rating will be assigned to the stock.