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Charting how Amazon's ad revenue can overtake Facebook's

20 Feb 2019  |  Ruben Schreurs 
Charting how Amazon's ad revenue can overtake Facebook's

With Amazon's ad services growing at pace, Facebook could be usurped within the next five years, writes Ruben Schreurs

When Jeff Bezos founded Amazon nearly a quarter of a century ago, its aim was to create “the earth’s most customer-centric company”. Whether or not it has achieved these aims is moot. From bookseller to sprawling global empire, it’s clearly doing something right.

Data, of course, underpins its meteoric rise and rise. Some 100 million Prime accounts and many millions more consumers provide Amazon with swathes of information that drive its decision-making. What customers want drives what Amazon provides.

Consequently, some 55 per cent of consumers turn to Amazon first when searching for products online. As the Amazonification of our lives reaches critical mass, almost as an afterthought, Amazon has become the world's third biggest recipient of advertising dollars. The Facebook and Google Duopoly is being challenged. The newly-minted Triopoly is now a reality.

Amazon represents four per cent of the American digital ad market, compared to 37 per cent from Google and 21 per cent from Facebook. In other words, it lags its nearest competitors by a country mile. It’s the rate of growth that is most alarming for the Duopoly. Amazon’s business has more than doubled in the space of 12 months to $10.1 billion of revenue - driven primarily by the growth of its ad business.

Ad sales will overtake Amazon’s respected cloud services as its biggest profit centre within three years. In four years, Amazon’s ad revenue will overstep $36 billion, which is Facebook’s global revenue in 2017, according to Julian Cook, portfolio specialist in the Equity Division covering the US Large-Cap Growth and Blue Chip Growth Equity Strategies. Let’s for a minute presume Amazon won’t be overtaking Google any time soon. But Facebook? It could be usurped within the next five years, subject to market conditions.

More than any other digital behemoth, Facebook has had a rough few years. From fake news to false metrics, Russian propaganda to propagating terrorists, cyber bullying to aggressive tax avoidance, questionable effectiveness to murmurs of antitrust and, just yesterday, the near-likelihood of draconian regulation where it has failed to sort out its affairs, Zuckerberg has lost control of his nine-headed hydra.

Despite all of the above, Facebook still crushed analyst estimates in almost every area last quarter. User growth is up, and its seven million active advertisers drove Facebook's average revenue per user, or ARPU to $7.37 — a 21 per cent increase from last quarter and a 19 per cent increase from last year. Ad revenue grew 37 per cent year-on-year, which is impressive — but pales in comparison to Amazon’s growth by nearly a third.

Facebook is still growing, but Amazon is growing faster. Some of Amazon's growth can be put down to accounting changes which now classify some ad services as revenues. But what will define Amazon’s advertising success is how many dollars it can poach from the other two. At present, analysts predict, somewhere between 15 and 20 per cent of Amazon’s ad dollars are from the social and search giants, while the vast majority comes from traditional media. Increasing this share poses a real threat to the Duopoly.

Fairly new to all this, Amazon is doing its best, seeking new ways of reaching consumers within its walled garden. The trove of first party data Amazon possesses — linked to real people with real purchasing habits — goes far beyond the targeting Facebook currently offers. Access to knowledge about the intentions of consumers who are quite literally often at the point of purchase is an invaluable asset to advertisers.

Ecommerce has been Amazon’s focus for over 20 years, but it’s hard to keep growing rapidly in any market after a certain point. This quiet scope creep is just the beginning.

Facebook on the other hand, can’t claim its foray into ecommerce has been a roving success, at a time when it desperately needs to diversify. Indeed, Instagram, a veritable growth machine in recent years, is waning. "When we look into 2019, we do expect to see a deceleration of revenue growth throughout the year," said David Wehner, Facebook's chief financial officer, during the company's fourth-quarter earnings call.

Instagram, like Facebook, is already at ad saturation. Instagram users are complaining about the huge volume of advertising ruining the experience of using the app, even though Facebook claims a user will only see three or four ads in a 10 minute window. This limited space is pushing up the price of Instagram ads when cheaper options, such as Amazon, are available. If it tries to scrape too many ad dollars from the bottom of the barrel, it can’t expect users to stick around.

Two worlds collide here. Facebook is an established ad network at saturation, revenue is slowing down, the price of space is rising, and the Pandora’s Box of issues for which it has hardly been held accountable is being pried open. Amazon, taking baby-steps, is catching up quickly. If for whatever reason Facebook’s ad revenue declines by even a few percentage points, at its current rate of growth Amazon will claim silver in no time at all.

For advertisers, breaking up the duopoly is probably a Good Thing — competition should in theory drive down prices. But how effective Amazon ads are is yet to be established. What is most important, wherever you’re spending money, is that brands should focus on measuring ‘outcomes’ — real effects of digital advertising — before pouring millions into a shiny new toy.


Ruben Schreurs, CEO, Digital Decisions.

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08 Jul 2020 

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