Can Amazon Break Facebook, Google Stranglehold on Advertising?

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Now that Amazon.com Inc. (NASDAQ: AMZN) has laid waste to traditional brick-and-mortar retailing, leapt to the top of the heap in cloud-storage and invented a whole new sector of voice-controlled home assistants, what can the behemoth tackle next? How about advertising?

The internet advertising duopoly of Alphabet Inc.’s (NASDAQ: GOOGL) Google and Facebook Inc. (NASDAQ: FB) snagged $79 billion and $27 billion, respectively, in 2016 ad sales. Amazon does not break out ad sales, but a report at Digiday cites eMarketer estimating 2016 ad sales at a paltry $500 million, rising to $1.5 billion in 2017 and to more than $2.4 billion by 2019.

London-based creative agency VCCP said that it saw advertisers switching paid search dollars from Google to Amazon over the past nine months and is seeing strong return on investment. Ad agency Group M reckons clients are spending 10 to 15 times more on Amazon paid search ads in every month this year compared with spending last year.

In the not-so-distant past, Amazon focused on search results and banner ads for its ad revenues, but that is changing fast as the company adds coupons, embedded buttons that add items to wish lists, and, maybe most important of all, an ad network that delivers ads to other websites.

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The reasoning behind the push into an ad network is probably pretty simple: margins. Retail margins are notoriously slim, with 5% being a healthy level. Advertising profit margins could fall into a range of 20% to 30%.

Amazon Web Services (AWS) grew first-quarter revenue by 42% year over year to $3.66 billion. Operating income rose by 47% to $890, or about 24%. The company’s total reported net income for the quarter was $790 million.

In the second quarter of this year, Amazon reported net profit of $197 million on revenues of $38 billion. AWS revenues totaled $4.1 billion and operating income rose to $916 million.

AWS revenues have fallen for eight consecutive quarters, according to a report at CNBC, as Microsoft Corp. (NASDAQ: MSFT), along with Alphabet and Alibaba Group Holdings Inc. (NYSE: BABA), have continued to poach the cloud.

A threat from Amazon aimed at its paid and programmatic search market is nothing less than an existential threat to Google. The tussle is just getting started, but it bears watching.