• Thu. May 23rd, 2024

Amazon is quietly building the most powerful advertising machine in the world

Amazon (AMZN) ads could take over your life.

Already worth billions, Amazon’s nascent advertising operation will likely become its next great business. And for the most part, it’s flying under investors’ radars.

With its current trajectory, the ad business could even stand toe-to-toe with Amazon’s cloud business, Insider Intelligence analyst Andrew Lipsman told Yahoo Finance.

“There’s no doubt this advertising business is an unbelievable profit generator,” Lipsman said. “The margins are exceptional and could be every bit as important as AWS.”

‘Clicks are dead’

Investors would be forgiven for missing Amazon’s $10.6 billion in advertising revenue in the second quarter.

The company didn’t start breaking out its ads business in its filings until Q4 2021 when it revealed that the previously unseen division made $31 billion annually. As of Amazon’s latest earnings report, the ad business has grown 22% year over year, according to filings.

Data is at the center of all this, said Swiftly chief revenue officer Andy Friedland, previously an Amazon ads executive. For e-commerce, better data leads to sales for Amazon and other advertisers.

“Hands down, data is the North Star and the core strength of Amazon’s ad business,” Friedland told Yahoo Finance. “They took the time to invest in robust closed-loop-reporting technology and that pays in spades.”

In the next few years, Amazon’s ads business may even headline (or sub-headline) the company’s earnings reports, as Amazon is uniquely positioned to solve a longstanding problem in e-commerce: getting consumers to move from browsing to buying.

Right now, Amazon’s ad business is centered on what’s called retail media, which is advertising at or near the point of purchase.

“I think advertising [for Amazon] is going to be massive,” said Brian Mandelbaum, CEO and co-founder of commerce data company Attain. “It’s part of a marketplace, where advertising is the targeting. Marketers don’t care about clicks anymore. … Amazon has planted a flag in the ground and said, ‘Clicks are dead — it’s all about sales.'”

Amazon has turned its online store into an advertising powerhouse in just a few years. (AP Photo/Richard Drew)

All Amazon’s businesses feed into advertising

Amazon is a master of both expansion and integration, “self-reinforcing businesses” as journalist and author Brad Stone has called them. Although the tech giant is primarily viewed as a retail and cloud business today, it could be headed toward a place where its other businesses feed into advertising.

“Amazon has everything,” said Ikkjin Ahn, CEO and co-founder of machine learning and ad company Moloco. “Amazon has data. Amazon has conversion. … Amazon’s leading the way in performance-driven advertising, which is the fastest-growing area and is powered by machine learning. There’s a secret sauce in Amazon advertising.”

For Amazon, it all boils down to this: How can I use customer third-party data to put ads in front of the people most likely to convert? Then, how can I do that over and over again?

As Amazon expands its footprint with grocery stores and physical locations, it’s literally building with advertising and data in mind.

“In-store advertising is a massive opportunity,” Lipsman said. “There are a lot of measurement challenges around the effectiveness of in-store advertising, but because of the way Amazon stores are architected, they’ll have the fidelity of data to understand that the same consumer they see on the web will be going into these stores.”

A man uses his smartphone to enter an Amazon Go convenience store in Rockefeller Center in the borough of Manhattan in New York City on Friday, January 28, 2022. (AP Photo/Ted Shaffrey)

A man uses his smartphone to enter an Amazon Go convenience store in Rockefeller Center in the borough of Manhattan in New York City on Jan. 28, 2022. (AP Photo/Ted Shaffrey)

That extends to the media assets Amazon has been building out too, Lipsman said. “Alexa was the first of those, then came Amazon Studios, Twitch, the NFL,” he added. “These are all vehicles through which advertising can be delivered.”

And that’s just the start. “There’s the AWS connection, where Amazon has all these cloud capabilities that will enhance ad capabilities,” Lipsman added.

Taken altogether, it’s likely that Amazon’s ads business will be bigger than retail. Already, advertisers are beginning to change how they perceive the tech giant.

“What marketers really think of Amazon is they’re not a retailer anymore,” Mandelbaum said. “They’re a marketing machine. … Retail is almost a loss leader to the business of driving conversions.”

Just how big could the business get? According to Friedland, it “can easily reach $100 billion.”

“You’re going to see their ad revenue keep pace with their retail growth, staying somewhere around 10% give or take a few points,” Friedland added. “That alone is a huge driver of the continued success of the business.”

Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on Twitter at @agarfinks.

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