I noted weeks ago that Amazon has built a solid advertising business and could challenge Google in the merchant ad spending. Yes, just like that Amazon has built another solid unit in the empire.
Amazon now runs a serious advertising business. And there are many companies putting money in that ecosystem. If companies think that advertising on Amazon is a better deal than promoting their websites on Google, it simply means that Google has a major problem in its hands.
This may explain why Google is not showing friendly handshake to Amazon these days. Amazon is not just attacking Google, it is going to the heart of its business which is advertisement.
Now, the numbers have started coming. In its latest quarter, this week, the e-commerce giant recorded $52.9 billion in revenue, a 39% year-on-year increase. Profits hit a new record, reaching $2.5 billion for the first time, while Amazon Web Services posted a 49% jump in sales to $6.1 billion.
“A big contributor to the quarter and the last few quarters obviously has been strong growth in our highest profitability businesses and also advertising,” Brian Olsavsky, Amazon’s chief financial officer, said on a call with media. “We’ve seen a greater-than-expected efficiency in a lot of our spend in things like warehouses, data centers, marketing.”
The company is working to automate tasks for advertisers and to help media buyers measure the results, Olsavsky said.
Key to its allure has been that advertisers’ placements result directly in sales, reaching customers on Amazon with an intent to shop. That contrasts with ads reaching users who are on industry leaders Facebook and Alphabet Inc’s (GOOGL.O) Google for a range of purposes.
Simply, Amazon advertising delivers better results than Google’s. If Amazon begins to automate that process, it could pose a huge challenge to Google. When you search on Amazon.com, you are actually in the process of spending money. Google delivers traffics to websites of merchants; Amazon is delivering revenue in dollars to them. That is why this is exciting for this company, and investors like the Amazon Advertising vision.
The One Oasis Strategy
Ecommerce remains the best product for Amazon. It is the oasis in the one oasis strategy. The advertising, just as the cloud business is helping the oasis, the ecommerce.
Every product is like the animal that returns to the oasis for water. Every product is like the humans that depend on the oasis for habitat. Provided that the oasis is there, and doing well, their survivals are guaranteed. Yet, as those new products do well, they could find new customers, beyond the first customer (that best product). That means, you can introduce them to the markets for other customers to buy, even when they are supporting the best product, which is the most important reason the original investments were made.
Amazon: Amazon is an ecommerce company with massive user base. It supports billions of transactions in a year and needs computing resources to keep its portal functioning well. Amazon could have called IBM to rent a cloud infrastructure for its ecommerce. Rather, Amazon decided to build one in-house knowing that the future of its ecommerce will be driven by the capacity to offer great experiences to clients. The cloud infrastructure investment is necessary as growth in the ecommerce keeps going up. It does not make sense to be sending that money away. So, Amazon went and invested in cloud. The ecommerce is the oasis and the cloud is like the animal that finds habitation from the oasis. Provided the ecommerce is doing well, the investment in cloud has minimal risk. The first customer to the cloud business was ecommerce and that means Amazon does not have to worry if there is any external customer for the cloud services. Amazon does not need to check market dynamics to invest in cloud provided its ecommerce business is doing well.
Amazon is building a solid business using the one oasis strategy. The advertisement, just as the cloud business, is now heavily making the ecommerce unit better. The Amazon search was initially engineered to make the ecommerce better. Now, it is earning revenue because it has become an advertising business.