Amazon.com Inc. ( AMZN ) handles nearly half of all online sales in the U.S., giving it a popular platform and a wealth of consumer data. Now it’s on track to become the next juggernaut of online advertising, and its rise threatens to upend Silicon Valley’s ad titans and change the way business is done on Madison Avenue.
The online retailer has ascended to the No. 3 spot in the U.S. digital ad market behind the dominant players, Alphabet Inc.’s Google and Facebook Inc. Though Amazon has just 4% of the market now, the company is expanding its avenues for marketers and hiring aggressively for its ad unit.
Some marketers eager for a new digital ad alternative are also conflicted about the rise of Amazon—a competing retailer with its own in-house brands to sell—setting up a new potential source of tension.
Amazon’s ad revenue is on pace to double this year, to $5.83 billion, according to eMarketer. Its ad sales are expected to jump $28.4 billion over the next five years, according to Cowen & Co.—more than the combined increases in ad revenue for all television networks globally, according to figures from media-buyer GroupM.
The cumulative effect is an earthquake whose tremors will be felt by anyone selling ads, including digital publishers and TV networks. Retailers like Walmart Inc., Target Corp. and Kroger Co. , which get paid by brands to place products in desirable locations within their stores, are already losing business to Amazon, ad executives say.
“I think the giant has been awoken,” said Bill Wise, chief executive of Mediaocean, a software platform that processes over $150 billion of ad spending annually.
While Amazon has rapidly expanded into a number of new businesses in recent years, including groceries, entertainment and pharmaceuticals, its ad business has grown organically into a high-margin business. Its planned headquarters in New York City will give it a new, stronger tie to the traditional center of advertising, one that could lead to Amazon hiring away talent.
Meanwhile, the world’s biggest ad agencies are racing to become specialists in how Amazon wants to do business, which is unlike anything they’ve seen before.
A big chunk of Amazon’s ad business comes from its retail site, where companies pay to be listed as a “sponsored product” high up in the search results when a user enters a term of search
Amazon’s ad business now contributes to gross profit and is expected to generate more income than its cloud business—which currently provides the bulk of its profits—as soon as 2021, according to Piper Jaffray analysts.
Amazon is expected to collect 15 cents of each new dollar spent on U.S. digital ads in 2020, up from 5 cents last year, according to an analysis of data from research firm eMarketer.