Amazon is on course to command 10.2 per cent of US digital ad spending this year © FT montage

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The surge in online shopping triggered by the Covid-19 pandemic has put Amazon on course for its first-ever $100bn quarter, but it has also boosted an overlooked part of the company’s business: advertising.

As more and more merchants cram on to Amazon’s vast marketplace, brands that want to stand out are spending heavily on ads.

As a result, Amazon’s “other” business unit, which is made up almost entirely of its ads business, is growing faster than its retail, cloud computing and Prime subscription divisions.

According to FactSet, a financial data company, Amazon’s “other” unit will make $21bn in revenue in 2020, a 47 per cent jump on last year. Its rapid growth is helping Amazon to chip away at online advertising’s dominant player, Google.

“I don’t think there’s enough recognition for just how big of an advertising business Amazon is on the way to creating,” said Andrew Lipsman, principal analyst at eMarketer. 

“We still expect solid, if not strong growth, by traditional standards for Google in both 2020 and 2021 — but increasingly Amazon is eating into that growth.”

Amazon offers advertisers data that is irresistible: a closed loop that shows them how effective every dollar they spend is, and more than two decades of insight on the actual buying habits of consumers, rather than just their web-browsing habits.

“I can understand better the value of $1 spent on Amazon because I can literally see the transaction,” said Eric Heller, who runs the Amazon Center of Excellence at WPP, the world’s largest ad agency, which advises on how best to use Amazon’s platform.

Mr Heller noted several studies had shown that people were increasingly searching for things to buy directly on Amazon, rather than on Google. For marketers, Mr Heller said, it was the difference in reaching the person searching for “athlete’s foot cream” rather than “why does my foot hurt?”

The vast majority of Amazon’s advertising revenue is driven by this behaviour, with advertisers bidding to gain prominent spots as “sponsored” listings at the top of product search results, capturing the attention of the more than 200m unique visitors to Amazon sites every month.

According to JungleScout, which provides management software to third-party sellers, the most coveted searches, such as “noise-cancelling headphones”, can sometimes be sold for in excess of $7 per click — a fee paid regardless of whether or not the customer goes on to buy the product. 

Amazon vs other ad players

Just over one in 10 clicks will on average result in a buy, according to Marketplace Pulse, an ecommerce research firm.

Some critics argued that Amazon’s sponsored results were effectively a listings tax, an additional cost of doing business on top of the commission the group already takes — which itself was more than $20bn in the last quarter alone.

“Amazon is becoming more and more a pay-to-play platform,” said Mitchell Bailey, from Kaspien, a company that provides advertising services for brands on ecommerce. “Unless you’re willing to invest in their advertising platforms, it’s much more difficult to compete.”

Sponsored posts are a source of continual friction between Amazon and major brands because it allows competitors to pay to appear above rivals, even if a customer has searched for a specific brand name. A recent query for “Sennheiser headphones”, for example, presented an unknown Chinese headphone brand, a drum kit and a rival Japanese brand — Audio-Technica — before any Sennheiser products.

Despite this — or perhaps because of it — more brands than ever are willing to pay, especially during the pandemic. A survey of 1,000 major brands conducted by Feedvisor suggested the number advertising on Amazon has risen to 73 per cent this year, up from 57 per cent in 2019.

Amazon is also attracting advertising from brands that do not sell their products on its website, such as carmakers and insurance companies, which are keen to use Amazon’s purchasing data to target the right people. A buyer of baby clothes, for example, may also want a new family car.

The company told investors that 2021 will see it step up sales of display ads outside of Amazon’s main website, on its games streaming platform Twitch or via devices such as the Fire tablets and TV stick, or Kindle ereader.

Expanding its footprint further, the group also offers slots on specialist web properties such as the movie site IMDb, or book review hub Goodreads. Amazon Publisher Services, meanwhile, is a small competitor to Google’s AdSense, which places targeted ads within partnered websites.

US net digital ad revenues at Amazon

It all amounts to the foundations to eventually turn the Facebook-Google duopoly into a three-way fight. In just over two years, Amazon has gone from languishing behind Microsoft and Verizon in the digital marketing space, to being a comfortable third.

This year, Amazon is on course to command 10.2 per cent of US digital ad spending, versus Facebook’s 23.5 per cent and Google’s 29.8 per cent. By 2022, Amazon’s share is predicted to be almost 13 per cent — a slow but meaningful encroachment into a high-margin industry. 

“They were late to it,” said Joe Zawadzki, chief executive of adtech group MediaMath. “This is their third business. But they’re coming in from a standing start, four or five or six years ago, to being a must-have on most marketers media plans.”

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