Is advertising a bright spot for Amazon?

For the big internet companies that make their living from selling advertising, these are troubled times. As happens in any kind of economic slowdown, businesses cut ad spending quickly. For Amazon.com Inc, though, whose e-commerce business is getting hammered, advertising is proving to be a bright spot.
Well, relatively speaking. Just as it did for Amazon’s rivals in digital advertising, the company’s ad revenue growth rate slowed in the second quarter to 18% from 32% in the fourth quarter, before the recent slowdown began, Amazon reported. But it’s still cruising on the highway at a decent speed compared with some other digital ad companies. Ad revenue at Meta Platforms Inc, most obviously, decelerated to minus 1.5% in the second quarter from 20% in the fourth quarter. Even Google’s ad revenue slowed to 11.6% in the quarter from 32.5% in the fourth quarter.
And compared with the rest of Amazon’s business — aside from Amazon Web Services, investors’ favourite business — advertising is a star. After all, online sales fell 4% in the quarter. Moreover, given the high-profit nature of advertising, the business is likely now a key contributor to the company’s bottom line. AWS’s operating profits of $5.7 billion offset losses of $2.4 billion at the rest of Amazon. But without advertising, the rest of Amazon would have lost much more money.
Having said all that, it’s important to acknowledge that much is unknown about Amazon’s ad business, which makes assessing its growth prospects and true profitability difficult. Investors deserve more clarity about it.
For instance, how much of the $8.7 billion in advertising in the second quarter was driven by merchants that sell their goods on Amazon’s marketplace and want to ensure prominent placement? It’s not clear these merchants do so willingly or happily. A 2020 congressional report on competition in digital markets cited evidence that “Amazon may require sellers to purchase their advertising services as a condition of making sales on the platform.”
One potential reason for investors to be concerned, then, is that any kind of regulatory action against such practices could squeeze Amazon’s ad revenue. Another, related point: Search results on Amazon have become so crowded with ads that the company risks alienating shoppers looking for actual results.
Even so, there’s no question that Amazon is an increasingly successful ad platform. People in the ad industry say that Amazon is seen as an effective place for brands to buy ads. Its wealth of data on what consumers are shopping for means advertisers can target their ads precisely at the customers they’re trying to reach. Other retailers are building similar ad businesses, with some success. Indeed, GroupM, the world’s biggest media buyer, says its biggest packaged-goods clients increased their spending on what it calls “retail media” — Amazon and the websites of Walmart Inc and Target Corp — to 12% of their total US ad spending in 2021 from 3% in 2019.
Moreover, Amazon is not just selling on ads on its marketplace but on other properties, such as its Freevee video streaming service and on its Twitch gaming site.

—Bloomberg