Amazon is getting serious about marketing its capabilities as an ad platform. The e-commerce giant has recently showcased its advertising chops to employees internally for the first time.
It’s also stepping up efforts to gain brand spending externally. But although Amazon’s ad business shows promise, it still has a way to go before competing on the scale of Google and Facebook, The Information reports.
Amazon’s ad business generated around $1.4 billion in 2016, according to Barclays estimates. The company doesn’t break out its ad revenue but includes it in the “other” segment. This segment reached $1.6 billion in 2016, jumping 56% year-on-year. Many see this as clear evidence of Amazon’s swelling ad business. Amazon is expected by eMarketer. to become the third-largest digital advertising player by 2019 with $2.4 billion in revenue.
Amazon’s value proposition to advertisers is its ability to target people who shop online. About half of all online shoppers start their product searches on the site, and the company has a base of 300 million active customer accounts. Amazon also offers advertisers the ability to target certain shopper segments. It has a programmatic ad platform, and sells sponsored products, display ads, video ads, and is exploring an ad product for the Alexa voice platform too.
Amazon is starting to embrace the potential that advertising can have on its business. Its philosophy is that ads can help merchants sell their products while simultaneously enhancing the shopping experience for consumers with relevant ads. Amazon arguably has the most valuable data set on consumers’ online shopping preferences. It can marry this data with its e-commerce platform to serve ads that translate into real sales.
It has potential, but Amazon’s ad business is puny compared to Google and Facebook. Google had close to $80 billion in ad revenue in 2016, while Facebook had almost $27 billion in revenue. For the time being, Amazon’s ad arm provides a high-margin revenue stream that can subsidize its other businesses. This can help to prices for consumers, secure new content for Prime Video, fund its international expansion, and allow Amazon to invest in new product lines.
There’s no question that consumers are increasing the amount of time they spend consuming digital media, while advertisers are increasing their ad budgets into digital channels. What may come as a surprise, however, is the complexity of the interconnected web of companies involved in the process of delivering digital advertisements to end users. Collectively, these companies are known as “advertising technology,” or “ad tech” for short.
Ad tech companies are intermediaries between advertisers and publishers, and add value to the ad delivery process by consolidating inventory, automating workflows, and offering precise targeting capabilities at scale. The automation of ad buying is also known as “programmatic advertising” — that is, using technology and software to buy digital ads. Programmatic ad spend in the US is quickly ramping up: It will top $20 billion this year and reach $38.5 billion by year-end 2020.
But ad tech’s ascendancy isn’t without its drawbacks. The advertising industry in the US is dominated by two main players: Facebook and Google. As a result, ad tech players are fighting for a pretty small piece of revenue pie, one of the many drivers of increased consolidation in the space.
Kevin Gallagher, research analyst for BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on ad tech that examines the different players involved in the process of delivering ads, the formats that are driving growth (notably mobile and video), and the factors that are driving increased consolidation over the coming years.
Here are some key points from the report:
- By 2020, mobile will be the biggest online advertising market, and video the fastest growing.
- So-called “walled gardens” Google and Facebook lead a relatively small group of players that attract the vast majority of digital-ad spending in the US today.
- Growth can be challenging for players outside the walled-garden duopoly, and many companies are reaching a level of maturity that may prompt investors to push for an exit.
- Ad tech is poised for consolidation, and the number of companies in the industry will decline significantly over the next few years.
- Companies specializing in certain ad formats like mobile, video, and TV are attractive targets. They are well positioned to take advantage of the fastest growing segments of digital media.
In full, the report:
- Forecasts US programmatic revenue through 2020.
- Highlights the factors driving consolidation, and identifies new acquirers and attractive targets.
- Explores the challenges ad tech companies face including the dominance of walled gardens, ad blocking and measurement.
- Outlines emerging technologies that will help propel ad growth in the next decade.
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