Sleeping ad giant Amazon finally stirs

Analysis: Sleeping ad giant Amazon finally stirs

1:09am EDT

By Alistair Barr and Jennifer Saba

SAN FRANCISCO/NEW YORK (Reuters) – Amazon.com Inc is known in the advertising industry as the “sleeping giant” because the world’s largest Internet retailer harbors a trove of consumer-spending data that many marketers have called an unrealized opportunity.

Now it’s awakening to the potential. After running ads on its own website for years, the company has taken the first steps toward becoming a true Internet advertising network, using the knowledge garnered from its data to place targeted ads for some of the world’s biggest advertisers across thousands of other websites.

An Amazon mobile ad network, launched late last year, is now blasting ads via apps on smartphones and tablets, including Apple Inc iPhones and devices powered by Google Inc’s Android operating system.

For Amazon, an ad business is a new revenue stream with fatter margins than its retail operations. To Google, Facebook Inc and other online ad leaders, Amazon is a threat because it has data they lack.Google knows what people are searching for. Facebook knows what people like and who their friends are. Amazon knows you searched last week for running shoes, but also that you bought a pair a year ago. That kind of information has advertisers salivating.

“In today’s marketing world, data is gold and Amazon is Fort Knox,” said Jeff Lanctot, chief media officer at digital ad agency Razorfish, which counts Mercedes Benz USA, Delta Air Lines and McDonald’s among its clients.

Lanctot has worked with Amazon for over a decade and says the company’s attitude to advertising used to be “take it or leave it.”

“Now it’s clearly an area they decided to invest in,” he said. “They have made a concerted effort to listen to what advertisers want – the type of data you need, the type of scale you are looking for.”

ANOTHER $1 BLN BUSINESS?

Amazon is getting into hotly contested turf. Google, Yahoo, Microsoft, Facebook and AOL command two-thirds of U.S. online advertising, according to eMarketer.

But its consumer data gives it a unique proposition, industry insiders argue. And though the competition will be stiff, it could be worth it.

Online advertising has 20 to 30 percent profit margins versus less than 5 percent for Amazon’s retail business, according to Ben Schachter, an analyst at Macquarie.

On Thursday, when Amazon reports results, analysts will be looking for signs of growth in higher-margin businesses, such as advertising and cloud-computing, after years of sacrificing short-term profit to grow those divisions.

Amazon does not disclose ad business results and spokeswoman Kristin Schaefer Mariani declined to comment.

But analysts estimate the ad business already generates at least $500 million a year in revenue. David Selinger, a former Amazon executive who runs e-commerce personalization firm RichRelevance, recently predicted that Amazon’s ad business will hit $1 billion in sales this year.

That’s a fraction of Amazon’s revenue, expected to be $75 billion this year. But longer term, the ad business could become substantial if it can grab a bigger slice of a digital ad market that will be worth over $50 billion by 2015 in the United States alone, according to eMarketer data.

“Could it rival something like Yahoo, Facebook or AOL’s ad businesses?” said Macquarie’s Schachter. “Sure.”

ADS ON OTHER WEBSITES

Display ads on Amazon’s own websites have grown fast since 2011 but what really excites Madison Avenue and Wall Street is Amazon’s latest push to create and serve ads on other sites.

“The big opportunity is in having a third-party ad network,” said Schachter. “There are only a few Amazon sites. Expanding beyond that, they can take advantage of millions of other websites out there.”

Amazon quietly started serving ads on other websites in the fourth quarter of 2010. This part of its business remained un-named until about the middle of last year, when the company formally christened it the Amazon Advertising Platform.

It currently serves ads on thousands of websites in the United States, Britain and Germany, according to its website.

Amazon’s Mariani declined to name websites. However, she said Amazon buys ad inventory – or online ad space – from content publishers or through exchanges, which are online markets for buying and selling inventory.

The company’s in-house technology serves the ads to third-party websites in real time. A campaign Amazon ran for Kimberly-Clark’s Huggies diapers, and another for video game designer Ubisoft, included ads served off Amazon websites.

This is where its advantage lies. It has tracked what millions of shoppers browse, search, and buy on Amazon.com for more than 15 years, using that information to recommend related products to customers. Now, it’s using that data to buy ad inventory more efficiently and serve ads to the right consumers, on the right websites, at the right time.

A large entertainment company worked with Amazon to promote one of its movies last year, according to a person at the entertainment company. Data on purchases of related DVDs, books and music on Amazon.com helped identify potential customers who were likely to see the movie at the theater and ads were targeted at this audience. Results were above average, based on the number of impressions served and the number of clicks on the ads, the person said. They did not want to be identified as they were not authorized to speak publicly about the company’s ad spending.

“Amazon spent a lot of time developing algorithms to make recommendations to consumers shopping on Amazon.com,” said an executive who oversees an ad exchange that is a partner of Amazon’s.

“Now they can do this outside of the Amazon world for other companies. It’s really an extension of one of their core competencies,” said the executive, who declined to be identified because Amazon is an important partner.

Armed with consumer information, Amazon can bid more aggressively on exchanges because it is confident that ads created from that inventory will be clicked on more often. The company can also charge advertisers more because its ads are better targeted, according to industry insiders and analysts.

“Amazon is not a retailer anymore, it is the largest behavioral marketing company in the world,” said Yaakov Kimelfeld, chief research officer at Kantar Media Compete, which helps global brands improve their online marketing. “Amazon will be the best positioned to predict whether to buy inventory or not and be the most efficient in this market.”

Amazon’s purchase data helps advertisers spend more efficiently because they only have to buy access to those consumers most likely to respond to their messages, according to Mark Pavia, an executive at media buying firm Starcom USA, which represents clients including Kellogg, Samsung Electronics and Mars.

“I can spend 100 percent of my dollars, if you will, against only the people I want to get because of the purchase data,” Pavia said. “That level of targeting is highly interesting.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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