Prime members, cloud services, third-party transaction markets, who is Amazon's fourth pillar?
By/Wang Ziwei@Retail Wei Observation
If you look at the financial reports of tech giants, you will find that they are all good at side businesses - of course, you can also call it "second curve growth". For example, Apple has developed wearable devices such as iWatch and AirPods, which brought in about $40 billion in revenue last year. Tesla's sales in 2022 were only $81.4 billion.
Amazon is no exception. In addition to its three main businesses - third-party transaction market, Prime membership system, and cloud computing, Amazon's advertising business is also growing rapidly. The financial report shows that in 2022, Amazon's advertising revenue reached $37.74 billion.
Is this number big or small? Let me put it this way, the combined revenue of these three social platforms - Twitter, Pinterest, and Snapchat, which earn advertising fees, is roughly twice the $37.7 billion.
In fact, this may be quite ironic. After all, in 2009, Bezos publicly said, "Advertising is the price you pay for a product or service that is not eye-catching." I believe Bezos thought so at the time, but now, well, Bezos has been "retired" for several years.
[One] "Everything can be an advertisement"
On Amazon, everything can be an advertisement.
You can replace Amazon with any e-commerce platform you know, such as Taobao, Tmall, Pinduoduo, etc. Even live streaming and short video platforms are the same. Intelligent algorithms will push content to you based on your preferences, and as for the proportion of advertisements, it depends on conscience.
Amazon has always put its advertising business in the "other" category in its financial reports. In February 2023, Amazon's 10-K filing showed that its advertising revenue in 2022 had reached $37.7 billion, compared to only $1 billion when advertising was first included in the "other" category in 2015.
Amazon's advertising business has grown like a rocket, and its annual revenue of $37.7 billion is only surpassed by Google's $224.5 billion and Facebook's (now called Meta) $113.6 billion.
[Two] Amazon's attitude towards advertising
In fact, in 2003, an article in IEEE INTERNET COMPUTING analyzed Amazon's recommendation mechanism, calling it "Item-to-Item Collaborative Filtering". For Amazon's users, the ultimate goal is personalized recommendations for their purchases, not advertisements.
The article stated, "At Amazon.com, we use recommendation algorithms to customize personalized online stores for each customer. The store adjusts based on the customer's interests, such as showing programming products to software engineers and showing baby toys to new mothers. This way, the click-through rate and conversion rate - two important metrics for the effectiveness of online and email advertising - can far exceed those of non-targeted advertising content."
However, in recent years, Amazon's "Customers who bought this also bought this" and "Customers who viewed also viewed" have been increasingly replaced. We can see "Sponsored products related to", "Brands related to this category", and "Frequently bought together" as the old recommendation logic.
Perhaps in Amazon's eyes, since there are so many third-party sellers (accounting for 59% of sales in Q4 2022), why should I recommend this traffic to you for free? You'd better pay for the display space.
However, when Amazon first sold ads, it was also taken advantage of: In 2005, Bezos asked to monetize the traffic under its umbrella. According to The Information, the first batch of ads were regular display ads on product pages. Although these ads were bid away, the traffic also went away because the link pointed to other retailers!
So, this project was quickly shut down.
A few years later, Amazon started to try advertising again, this time in a rapidly changing technological environment.
[Three] Embracing advertising again
The story of embracing advertising again is worth starting from when Bezos was still investing.
In 1998, Bezos wrote one of the most valuable angel checks in history. Bezos gave $250,000 in startup capital to two Stanford University PhD students. These two people are Sergey Brin and Larry Page - yes, they are the founders of Google. Their combined current wealth is $190.8 billion, while Bezos himself has a wealth of only $119.3 billion.
The book "The Everything Store" reveals the details:
"...The investment story began with Amazon's acquisition of Indian express service Junglee in 1998, which ultimately failed. But this acquisition brought Ram Shriram to the Amazon team, which was actually an accidental meeting for Bezos.
Shriram had been advising two Stanford University PhD students who were trying to invent a new way of internet search. In February 1998, Shriram became one of the first early investors in Google, investing $250,000. Six months later, Bezos and his wife were on vacation in the Bay Area, and he asked Shriram to arrange a meeting with the people behind Google. Shriram invited Bezos to have breakfast with Page and Brin at his home and demonstrated how the search engine works. Bezos immediately told Shriram that he wanted to invest. Since the early funding cycle had ended, Shriram took some time to persuade them, but Bezos, as the CEO, and his net worth of $1.6 billion at the time, shook the founders of Google and eventually got Bezos to invest."
Later, when Bezos talked about this investment, he said, "They didn't have a business plan, but they had a vision, and it was customer-centric, and I fell in love with them like that."
Six years later, in 2004, Google went public, and Bezos owned 3.3 million shares of stock, worth about $285 million. He sold it, otherwise, today it would be worth nearly $13.9 billion.
In the early 21st century, Amazon relied too much on Google's search to import traffic. According to The Information, Amazon even had a "Google Dependency Index" to track this dependence.
If Google's advantage is selling ads when people show purchase intent, then Amazon is the last step of the transaction: the purchase. Therefore, for third-party sellers, Amazon's transaction data is the most valuable. Otherwise, companies would just be spending money on advertising without making any sales.
However, recent data shows that over 60% of product searches start on Amazon. Since searches start on Amazon, it is understandable that Amazon makes money from searches.
[Four] What does advertising mean to Amazon?
The advertising business may already be Amazon's most profitable business, although Amazon does not mention its gross profit or operating profit contribution. But compared to Google's core advertising search business with a gross margin of 68%, you can also realize that the advertising business may generate contributions similar to Amazon Web Services (AWS).
After all, the more third-party sellers and SKUs there are on Amazon, the more they have the impulse to spend on advertising to sell their products. And similar to various advertising services on Taobao, Amazon also provides many services, such as "Sponsored Brands", "Sponsored Products", "Sponsored Display Ads", "Sponsored Posts", "Sponsored Videos", and so on - it is worth noting that in foreign countries, this kind of paid content is generally marked as "Sponsored", but not necessarily in China.
Although Amazon has said that the advertising business is "optional", the cost per click (CPC) of advertising is constantly rising, and it is not uncommon for some brands to spend 50% of their expenses on advertising and listing.
At the 2022 Prime Day, which lasted only two days, the sales revenue driven by advertising on Amazon increased 4.5 times compared to the daily average level of the previous 30 days. Amazon's advertising also made a lot of money: third-party data shows that the average cost per click of Amazon advertising during Prime Day was $1.67, which is 58% higher than the market price during the same period in 2021.
Of course, after the privacy changes in Apple's iOS, if we only look at Amazon's e-commerce ecosystem, Amazon is actually the biggest beneficiary: after all, advertising companies and businesses can no longer track end users through iOS. At this time, third-party sellers on Amazon are "reluctant to advertise, but have to".
At the same time, the scale of $37.7 billion in revenue is great, and what is more worth noting is its growth rate: the annual growth rates in 2021 and 2022 were 58% and 21% respectively, and the strongest growth occurred when Apple disrupted the advertising industry. It is worth mentioning that although the 21% growth rate for the whole year of 2022 is clearly slowing down, it is still acceptable during the entire pandemic period:
If we only look at the fourth quarter of 2022, Amazon's advertising still had a 19% year-on-year growth, while both Google and Facebook had negative growth.
Finally, as Amazon becomes more and more saturated, it is also looking for synergies within its entire ecosystem and constantly expanding its ecosystem. For example, Amazon acquired the NFL rights for 11 years (worth $1 billion per year) and gradually introduced advertising-supported content for its IMDB TV streaming product; and monetizing advertising through the game streaming platform Twitch, and so on.
What is scary is that the recent dynamics of the entire streaming industry have also pushed Amazon's advertising, such as Netflix starting to add ads in videos and shows. As streaming customers become accustomed to seeing ads on competitive platforms, this provides the possibility for Amazon to start adding ads on its Prime Video platform.
Marketplace Pulse, a well-known Amazon researcher, wrote, "Advertising has distorted Amazon's customer focus" and "affected Amazon's ability to innovate in exploration, personalization, and any form of interactive shopping."
He is not wrong, but at least Amazon can still satisfy its shareholders.