Can Online Advertising Drive Revenues For Amazon In The Long Term?

While e-commerce is its primary source of revenues, reports suggest that Amazon (NASDAQ:AMZN) has assembled a Google-like set of advertising tools and services indicating that it is looking to derive higher revenues from digital advertising. Amazon’s advertising revenues are not very significant currently, but the company is now looking to sell more advertising space on its website and reportedly has ambitious online advertising plans. According to eMarketer, Amazon’s share in the U.S. digital advertising market was around 1.6% in 2016. While this market is currently dominated by Facebook and Google, Amazon has a strong edge in this space given its relationship with brands and a huge data base of the shopping preferences of its customers. If Amazon focuses on online advertisements, this segment can become a profitable revenue stream for the company in the long term.

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Advertising Revenue Can Contribute Significantly To The Bottom Line

According to eMarketer, digital ad spending in the U.S. is estimated to grow from around $ 72 billion in 2016 to nearly $ 113 billion by 2020. If Amazon is able to grab a 20% share in this market by 2020, it could generate advertising revenues of more than $20 billion. Given the low margins of its e-commerce segment, this revenue can contribute significantly towards the company’s bottom line. According to our estimates, in 2020, Amazon’s electronics and general merchandize revenues will be around $200 billion and the direct expenses for this division will be around $ 180 billion, resulting in a net operating income of $20 billion from this division. Revenues generated from a higher share in the online advertising market can directly compete with its largest division, i.e. its electronics and general merchandize e-commerce segment.

While competition in the online advertising segment is intense, with Facebook focusing on videos and Google innovating several ways to attract advertisers, Amazon is in an advantageous position. Product advertising on its platform by brands who already sell via Amazon can lead to quicker and more frequent conversions. Further the company has other business streams such as streaming music, videos and its virtual assistant Alexa, which can potentially provide information about other requirements of its consumers such as entertainment, concierge services, etc. We believe with a large database Amazon can provide a unique advertising platform to marketers. Reports suggest that sponsored ads are likely to be introduced in Alexa soon. With its e-commerce business operating and succeeding on a low margin model, we believe digital advertising can provide a boost to Amazon’s bottom line in the long term.

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