Amazon’s ad business will surpass its cloud computing business AWS service by 2021, more than tripling in revenue over then news few years, according to a new report.
The report, from Piper Jaffray, looked at the retail giant’s other sources of revenue, aside from its dominant ecommerce and streaming business.
The analyst estimates Amazon’s ad business operating income will grow to $16 billion in 2021 versus $15 billion for Amazon Web Services that year.
On Monday Michael Olson, analysis at Piper Jaffray, said in a note to clients that: “while the Street has been focusing on the trajectory of core retail, growth of AWS, and new categories such as grocery & pharma, Amazon’s advertising business has been quietly growing into a massive driver of current and future profitability.”
“By 2021, we believe it is likely that advertising operating income will exceed AWS. … Investors should be focused on Amazon advertising now; this is a major driver to results and valuation today and continuing in the coming quarters & years,” Olson added.
He believes Amazon already has product search market share “well above” 50 percent. Olson noted the “Other” segment, where Amazon’s ad business resides, grew sales 72 percent in the second quarter.
“Being the world’s largest product search engine has its advantages and Amazon is starting to leverage them,” he said. “Advertising will be a driver to watch, as the retail industry continues to live or die by the shift to direct-to-consumer & digital channels and real estate on Amazon, more than any other digital company, may have a direct line of sight on the multi-billion do.
Analysis- another walled garden?
For the past few years, Amazon’s ad business has often been talked about as a sleeping giant. Now it looks like it’s waking up.
Amazon doesn’t report on advertising directly, but its advertising business makes up the majority of what it reports in its “Other” segment. That segment has been growing steadily over the past year, topping $2.2 billion in the second quarter of 2018. In 2017, Amazon reported a total of $4.65 billion in “Other.”
Amazon ad revenues topped $2 billion in Q1 2018. Source: Amazon quarterly earnings.
Kees De Jong, GM EMEA at Sizmek, said: “The ad industry is rightly concerned about the continued rise of walled gardens – they are severely lacking in transparency and require advertisers to relinquish control of their first-party data. Amazon’s growing ad business, while unsurprising, is yet another walled garden that is going to lack the transparency and openness that brands need in order to get valuable insights from their ad campaigns.
“The online marketplace may be sitting on an untapped resource of information thanks to its vast customer base, but it’s important to think of Amazon – and the other walled gardens – as just one part of the marketing mix. Putting all your eggs in their baskets might deliver certain results, but the valuable insights about how ad campaigns have performed and how consumers have responded won’t be there. And this means you can’t use this insight to build future campaigns, along with wider company strategy. Walled gardens might deliver in the short term, but in the long term you lose out on strategic vision.”