Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Leila Abboud is a former Bloomberg Gadfly columnist.

From Amazon.com Inc.'s origins as a virtual bookstore, it became an online mall for every product imaginable. Then the company stealthily built a computing utility business that now generates the majority of its profit, and it seemingly has ambitions to do much, much more

Without much fanfare, CEO Jeff Bezos has set his sights on yet another market: the $200 billion online advertising industry that is dominated by Alphabet Inc.'s Google and Facebook Inc. While Amazon's annual ad revenue is relatively small at an estimated $1.2 billion, the company has assembled a Google-like set of advertising tools and services that could become Amazon's next big thing.

New Money
Amazon's foray into digital advertising gives the company a fresh market to attack
Source: Amazon; Magna and Bloomberg Intelligence (for digital ad industry figure)
Note: Digital ad industry estimate is for 2016. Amazon retail sales are for the 12 months ended Sept. 30.

First, Amazon is increasingly selling advertising on its own sprawling sites to companies that want to pitch people as they shop. Search for mascara on Amazon and users will most likely see paid product placements from makeup companies and independent merchants that want their items to stand out from the crowd.

Away from its own websites, Amazon harnesses its trove of information about people's buying and browsing habits to help other companies find potential customers everywhere they go online. The company can help a digital camera company find tech gadget enthusiasts, based on those people's Amazon habits. The company also created its own ad-selling system to help website owners auction off their slots to the highest bidder. That's wading into the territory of Google's DoubleClick, a marketplace for web video and digital billboard ads. 

Amazon has been selling digital advertising for years. But it keeps broadening the scope of its efforts to the point where Amazon is starting to look a lot like Google, the world's dominant seller of online advertising with about $79 billion in 2016 ad revenue.

It's always hard to know how seriously the secretive Amazon is taking any of its many business initiatives. But people in the marketing world are buzzing that Amazon has big ambitions in online advertising. Veteran ad executives regard this with excitement and trepidation. Ad buyers would like an alternative to what they call the digital ad duopoly of Google and Facebook; on the other hand, Amazon could become a formidable competitor if it bypasses agencies and goes right to brands.

WPP Chief Executive Martin Sorrell, whose company is the biggest buyer of ad space globally, put it best at an investor conference in January: "The company that would worry me if I was a client -- or I think worries our clients, more than Google and Facebook -- is Amazon."

Minor Threat
The marketing industry is buzzing about Amazon's ambitions in online advertising, but the company is currently a tiny player in online ads
Source: eMarketer, Sept. 2016 estimates
Notes: Ad revenue estimates exclude commissions shared with internet partners. Verizon's advertising share includes the company's AOL and Millennial Media businesses.

At first blush, it seems outlandish to mention Amazon in the same breath as Google and Facebook, which together swallow 58 percent of all the advertising purchased in the U.S. online or on mobile devices. Amazon's share of the U.S digital ad market was just 1.3 percent in 2016, according to research firm eMarketer.

But advertising is already a highly profitable cherry on top of Amazon's low margin e-commerce sales. It generated roughly $1.2 billion in net advertising revenue globally last year, including $940 million in the U.S., eMarketer estimates. If Amazon's U.S. ad sales generated the same operating profit margin as Facebook, that would mean advertising accounted for about $395 million in operating income for Amazon last year, or roughly 18 percent of Amazon's total operating income in the last 12 months for its North American retail business. That's not shabby for a business that most Amazon shoppers know nothing about. 

Not Too Shabby
Amazon generates a tiny sliver of its revenue from selling advertising. But the high-margin business may be nearly one-fifth of the size of Amazon's notoriously low-margin retail business in North America.
Source: Amazon (North America operating income) and Bloomberg Gadfly estimate (advertising operating income)
Note: Estimate of advertising operating income applies eMarketer's ad revenue estimate for Amazon and assumes its ad business has the same operating income margin as Facebook.

And it would be unwise to underestimate Amazon's ability to grab a larger slice of the pie. Amazon has unique advantages as an advertising middleman. It knows more about people’s shopping habits than perhaps any company on earth. The company's Prime web video service means Amazon is also collecting information about the entertainment habits of millions of people. This is all highly valuable information for companies that need to gin up interest in new cars and vacation travel.

The biggest wild card is the potential connection between Amazon's digital advertising business and AWS, one of the company's crown jewels. AWS, which sells on-demand computing horsepower to companies, is already the technology backbone for big chunks of the internet advertising industry. It's possible to imagine the ubiquity of AWS helping Amazon's digital advertising business, and vice versa. 

AWS is also the best example of what Amazon can accomplish in new fields. Amazon started AWS from scratch 10 years ago, and it has changed the direction of both the company and the entire technology industry. That's the kind of impact Amazon can have when Bezos applies his huge ambition in the right places. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shira Ovide in New York at sovide@bloomberg.net
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net