Amazon’s Growing Ad Business Could Forever Change Tech

Google and Facebook’s ad business might not survive Amazon

Photo: NurPhoto/Getty Images

Google has long been known to monitor basically everything you do, and use the data it gleans to target banner and search ads. Facebook integrates ads into users’ news feeds, Groups, and other parts of the platform, which recently landed the company in hot water for running ads next to hate speech.

But there’s a relatively new, rapidly growing player in the online advertising world: Amazon. The company’s advertising revenue has grown from almost nothing a few years ago to over $10 billion in late 2020. Revenue is expected to quadruple by 2023. Given its unique business model, its history of swallowing whole industries, and its sheer size, Amazon has the potential to massively disrupt the online ad world — and forever change tech.

The success of online ads depends on how close a user is to buying something. That’s part of why search engine ads are so effective. If you type “Lunch” into Google, there’s a fair chance that you’re looking for a place to eat lunch. If the company can show you an ad for a restaurant, there’s a good chance you’ll click through and end up eating there. All the better if Google knows where you live and that you like burgers, and can show an ad for a specific burger joint in your neighborhood.

In contrast, services like Twitter struggle with ads because users are there to doomscroll horrifying Covid-19 news or see the latest bizarre thing Donald Trump said. They’re not there to buy stuff. Facebook suffers from a similar problem, but its intense knowledge of user behavior (down to the specific items you’ve purchased at thousands of retailers) allows it to target ads so effectively that it still makes massive sums of money — $69 billion in ad revenue in 2019, according to TechCrunch.

Few companies, though, are more intimately connected to peoples’ buying behaviors than Amazon. As of mid-2020, Amazon controlled nearly 40% of American e-commerce, and data from 2018 suggests that it may control as much as 94% in certain categories, like cosmetics and batteries. Overall, the company is forecast to control almost 5.5% of all retail in America in 2020 — especially as Covid-19 has forced consumers to do more of their shopping online.

If you’ve browsed Amazon lately, you’ve probably seen items listed as Sponsored Products. Sellers and brands pay to have their products advertised in this way. Sponsored Products generally appear first in search rankings. They’re also easy to confuse with Amazon’s Choice — products that are similarly flagged and ranked, but based on being “highly rated and well-priced” rather than on payments from an advertiser, according to Amazon. You may have clicked on a Sponsored Product without even realizing it. Especially as the pandemic has driven overall growth in e-commerce, other retailers like Target, Walmart, and CVS are increasingly challenging Amazon with their own versions of Sponsored Products and self-service ad platforms.

Marketers love these ads because they reach buyers right at the moment they’re about to purchase something. If I type “Lunch” into Google, I’m probably looking for that perfect burger place. But I could also be looking for recipes, photos of food, or a variety of other lunch-related content. If I type “shovel” into Amazon, though, I’m almost certainly trying to buy a shovel. And if a Sponsored shovel appears first in my search results, I’m probably going to buy that shovel. Brands have long known about this — according to a 2016 report by the Center for Science in the Public Interest, some brands pay “slotting fees” of $30,000 to $50,000 to have their products included on brick-and-mortar grocery store shelves, or featured more prominently within a store.

For every product I sold through a Sponsored Products campaign, Amazon was effectively getting paid twice — once for running the ad, and again for managing the sale of my product.

As a former Amazon seller, I can vouch for the power of Sponsored Products. The funds I put toward these listings were the most efficient advertising dollars I’ve ever spent. Every dollar I spent on Sponsored Products generated about $12 in sales. At least 30% of my sales for one product, a dog comb, came from a single Sponsored Product campaign using my competitor’s product name as the target keyword.

And the ads are cheap. For one campaign, I paid just $249 to show my ad to 1,049,000 people. Ads are cheap because Amazon has a vested interest in driving more sales. The company collects a commission of between 6% and 20% on every item sold through the site. For every product I sold through a Sponsored Products campaign, Amazon was effectively getting paid twice — once for running the ad, and again for managing the sale of my product. This likely allows them to keep ad rates lower than those charged by their competitors.

Ad prices may also be low because Amazon’s ad program has relatively little overhead. To understand what you mean by the query “Lunch,” Google has to run a massive, worldwide data-gathering program that peers into every aspect of your online and offline life, from the websites you visit to the humidity level in your home. That’s expensive. In contrast, when you type something into an e-commerce platform like Amazon, you’re telling the company exactly what you want to buy — no world-spanning surveillance program needed. Amazon has recently expanded its advertising program to Twitch (which Amazon owns), giving marketers the option to target the platform’s younger audience.

If the meteoric rise of Amazon’s advertising program continues, it could have massive impacts on the tech world. Amazon has continually proven itself willing and able to swallow entire industries, from its early conquest of book publishing and sales to its more recent takeover of cloud computing via the company’s wildly successful Amazon Web Services (AWS) platform.

AWS originally began as a way to eke a little money out of internal work Amazon had done to make life easier for its developers. It’s since grown — almost by mistake — into one of the most wildly profitable businesses in the world. The service earned Amazon over $7 billion in profit in 2018 — a substantially higher net profit than the company makes on actually selling things. In building AWS, Amazon also essentially ate Microsoft’s lunch, stealing an industry it was expected to dominate right out from under it.

By moving into the advertising world, Amazon could well do the same thing for ad-funded giants like Google, Twitter, and Facebook. Advertising is largely a zero-sum game — the ad dollars currently flowing to Google and Facebook come largely at the expense of newspaper, magazine, and television ads. If the dollars start flowing to Amazon instead, the other tech giants could see a massive drop in their bottom lines.

If the meteoric rise of Amazon’s advertising program continues, it could have massive impacts on the tech world.

That would have big ramifications for the advertising industry. But it would have an even bigger impact on tech. More than 70% of Google’s revenue comes from ads. For Facebook, that number is 98.5%.

Funds from advertising (and the public and private investment those funds unlock) are what allows the companies to invest in world-altering technologies that have little to do with their core businesses. For Google and its parent Alphabet, this has meant building the world’s second most popular email platform, its most-used mobile phone OS, self-driving cars, a fiber-optic network, and a company that planned to “cure death,” among much else. Facebook has spent its ad money on flying giant internet airplanes, developing brain-computer interfaces, and operating the wildly successful, wholly unprofitable messenger service WhatsApp for no apparent business reason.

Jeff Bezos’ personal passion for spaceflight aside, Amazon generally spends its revenues on one thing and one thing only: further enriching Amazon. Its top-secret research lab, Amazon Grand Challenge, is reportedly focused on projects like curing the common cold. Even this is likely a shrewd investment in the company’s growth. According to the Integrated Benefits Institute, a human resources industry trade group of which Amazon is a member, illness cost American employers $530 billion in lost productivity in 2017. Curing the cold would certainly have broad societal benefits. But as the nation’s second-largest employer, few would benefit as much as Amazon itself.

Amazon’s laser focus on its own growth is not necessarily a problem. It’s the company’s ruthless efficiency and culture of cost-cutting which has allowed it to grow so large and become so successful. And through its operations, Amazon does deliver many benefits to society (albeit, many say, at a cost to workers and individuals’ privacy) — innovations in voice recognition with its Alexa platform, a great deal of wildly creative new content through Amazon Studios, and the ability to have nearly anything delivered to your door in 48 hours. But you’re not likely to see the company develop technology for storing energy in molten salt or creating eating utensils for patients with hand tremors, both of which Google is working on.

If Amazon’s ad business continues its rapid growth, it would have several far-reaching effects. Firstly, we’d expect to see a much larger Amazon. AWS has already helped Amazon fund its international expansion and invest heavily in infrastructure, further securing its dominant position in e-commerce. Buoyed by billions in ad revenue, the company would have an even larger war chest with which to grow its empire.

But if the company indeed steals business from ad-funded tech giants, we’d also see another effect — a much smaller Google and Facebook. With lower ad revenues to fund their lavish tech spending, Google and Facebook would likely need to focus much more directly on their core businesses of search and social media, respectively. Google would have to rein in its X venture capital arm, and Facebook might need to divest from unprofitable acquisitions like WhatsApp.

Big tech companies like Google and Facebook invest directly in technology development, but they also employ and train legions of engineers who often go on to found their own startup companies. With less ad money, both of these activities would likely be scaled back, which could have a ripple effect on the launch of new companies and the availability of engineering talent.

The overall result would be a chilling effect on the tech industry.

If Google and Facebook stopped reinvesting ad money into buying innovative, emerging companies, startups would also lose two major acquisition targets (Google has reportedly spent over $19 billion on acquisitions since its launch). And a takeover of the digital ad market by Amazon would make it harder for new companies to build a business model around monetizing their user bases via advertising. That would likely make it harder for them to demonstrate a path to profitability, and attract the venture capital money they need to launch in the first place.

The overall result would be a chilling effect on the tech industry. In short, the same story which has played out in so many other industries would play out in tech, too: Amazon would grow, and everyone else would shrink.

Amazon’s move into the advertising world could have another consequence, too. It could finally force antitrust hawks to take action against the company. Legislators have been circling Big Tech for years now. Especially with the growth of AWS, Amazon looks like an increasingly juicy target for a breakup.

It’s already widely acknowledged in the tech industry that Amazon will eventually have to split off its AWS unit from its retail operations. An attempt to dominate digital advertising as well as cloud computing and retail might finally give lawmakers the leverage they need to call for a broader-reaching breakup of the company.

No matter who sits in the White House come January, these efforts would likely proceed — Donald Trump is generally against corporate breakups, but reserves a special hatred for Amazon and Jeff Bezos, which would make the company unlikely to enjoy special political treatment. Presidential hopeful Joe Biden has already criticized Amazon over its expansionary practices and hasn’t ruled out antitrust action.

This makes Amazon’s future direction uncertain. It could continue to foster the growth of its advertising business, as many expect it will do. But that would risk attracting unwanted attention from antitrust regulators, which might force the company to part with the money machine that is AWS. Amazon might also choose to pump the brakes on its move into advertising, and focus on growing its core retail business while flying under the antitrust radar.

Alternatively, it could choose to spin off AWS even without regulatory pressure. It could then use the proceeds to move full force into the advertising world. Advertising complements its core retail business much better than cloud computing, so this scenario seems distressingly possible.

Whatever move Amazon makes, the future of Big Tech potentially hangs in the balance. If the company chooses to steer clear of its competitors’ ad-funded business models, Google and Facebook can likely keep on growing their digital advertising empires, and keep bankrolling the myriad side projects and startup companies they currently support.

But if Amazon decides to take on Google and Facebook directly, it could result in a fight that saps the strength of both tech giants, and ultimately kills off the emerging companies that rely on them for funding and talent. The impact on the tech industry could be massive, world-changing — and permanent.

Co-Founder & CEO of Gado Images. I write, speak and consult about tech, privacy, AI and photography. tom@gadoimages.com

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