Analysis | Amazon’s Ad Business Is a Star. But Where Are the Details?

And compared with the rest of Amazon’s business — aside from Amazon Web Services, investors’ favorite 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.” (An Amazon spokesperson denied that merchants that sell on Amazon’s marketplace are required to buy advertising.)

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. And it sells ads on websites it doesn’t own across the internet, just as Google does. Unlike Google, though, Amazon doesn’t break out any details about how much of the revenue comes from which bucket.

That’s important for understanding the profitability of the revenue — and even how much of the revenue that Amazon actually keeps. When Google or Amazon sells ads on properties it doesn’t own, it gets only a cut of the revenue. Google discloses what it shares with those other properties. It’s not clear from Amazon’s disclosures what exactly it is reporting — net or gross ad revenue. Another thing: Selling ads on Freevee can’t be as profitable as selling ads on Amazon’s marketplace, given the cost of producing or licensing programming for the service. So how much ad revenue is Freevee contributing to the total?

It is time to stop talking about the digital ad market as one dominated by two companies, Alphabet Inc. and Meta. Amazon’s share of the US digital ad market is expected to reach 12.6% this year, Insider Intelligence estimates, up from 7.7% in 2019. Meta and Google, which had a combined 55.2% share of the market in 2019, will this year take 50.5%. And given that Meta’s ad revenue is likely to shrink in the next 12 months, Amazon’s share seems likely to grow through this downturn. As encouraging as that may be to investors, though, it is time for Amazon to provide clearer disclosure about the nature of its ad business.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Martin Peers is a Bloomberg Opinion columnist covering tech and media. Previously, he was deputy editor of the Wall Street Journal’s Heard on the Street column and managing editor of the Information.

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