Amazon’s advertising strategy under the radar to control 5% of global retail

Wedbush Securities analyst Michael Pachter just made a surprising prediction on Amazon in a recent interview on CNBC. “In my opinion, Amazon owns 1.5% of the global retail business. It can easily reach 5%, and probably 10% in our lifetime, ”he said.

Pointing to Fulfillment by Amazon and Amazon Web Services as engines of growth, growing by more than 30-40% per year, Pachter says Amazon could reach $ 1,000 billion in capitalization next week.

Scary stuff for any business that has to compete with it. Evaluating Amazon, Patcher thinks the metric people should focus on is its gross margin, which is growing so rapidly the company just doesn’t have enough to spend it all.

Amazon’s tentacles stretch far into the vast infrastructure of e-commerce. With its technological skills, dedication to efficiency, and premonitory strategies, Amazon finds opportunities where others don’t, like its Amazon Web Services. It reached $ 17.5 billion in revenue last year, making it the fifth-largest enterprise software provider in the world.

Today, Amazon is expanding a service capability it originally designed to drive its own growth and make it available to other businesses, just like it did with cloud computing.

This capability is digital advertising, which Ben Tregoe, SVP of Nanigans, thinks it’s Amazon’s next big disruptive game to dominate online retailing by controlling the advertising people see on their screens.

“Everyone knows Amazon as a competitor. Everyone knows they have an advertising business, ”Tregoe said, noting that in the first quarter of 2018 alone, Amazon generated $ 2 billion in advertising revenue.

“Corn what people don’t know is how well Amazon has been able to establish direct access to publishers’ offerings. He created the most efficient advertising supply chain by cutting out the middleman. The benefit is Amazon’s ability to gain these customers profitably.

Monopolize the advertising offer to meet growing demand

There are three pins in Amazon advertising offers. Amazon Marketing Services sells sponsored product ads, featured service ads, and cost-per-click product display ads to its partners. Through this service, Amazon receives revenue on the front-end (i.e. advertising) and the back-end when products are sold on Amazon.

“This gives them a huge advantage over Google and Facebook, which sell ads but don’t earn revenue from the sales generated by those ads,” says Tregoe.

Amazon Media Group provides display advertising on Kindle and Fire devices and on the web through its advertising platform. And Amazon Publisher Services provides access to Amazon’s header auction capability to compete with exchanges that allow advertisers to bid on inventory.

Tregoe believes Amazon’s foreclosure on top publisher platforms is largely under the radar of other advertisers who compete with Amazon for the best potential customers.

“An advertiser, for example Target, uses an agency with a demand-side platform connected to an ad exchange platform, like Google AdX or Rubicon, to bid on the audiences they want on the best media, for example example. New York Times or Hearst properties. Because of these middlemen, where Target starts with an ad spend of $ 1, they can only really invest $ 0.40 to $ 0.50 in these media, “says Tregoe.

But Amazon has built all that capacity on its own, giving them a big competitive edge in the battle for the best locations and the greatest customer reach.

“Amazon cut out the middleman and went directly to publishers. Amazon has created a lower cost supply chain and a more efficient and effective way to buy prints. Amazon can win a target bid of $ 1 with publishers with a bid of $ 1.01 and get the full value of that $ 1.01, unlike Target who gets less than half because of the middlemen. ” , he continues.

Amazon chooses the best customers and all other advertisers get the leftovers . “Target can’t make math work. It is structurally at a disadvantage compared to Amazon in auctions for the eyes of customers, ”he shares.

Amazon is # 3 in header auctions

One of the benchmarks of Amazon’s growing dominance in header auctions is measured by Adzerk. In its latest list of bidders used by publishers, Amazon ranks # 3 after AppNexus and Index, and ahead of Rubicon and OpenX.

“Amazon is the only direct advertiser on this list. Everyone on the list is an exchange or an ad network. Tregoe said. “When we show this graph to people, they have no idea that Amazon has so much direct access to sourcing.”

Tregoe can’t say if this creates new monopoly power for Amazon, but he says it sounds a lot like him. “Whether this qualifies as monopolistic, it is certainly an example of Amazon taking advantage of success in one market and using it to subsidize dominance in another market, i.e. advertising space in the market. to the detriment of competitors, ”he said.

For this reason, Tregoe believes we are heading into a troubling situation for both advertisers and publishers.

“Advertisers may only be able to access audiences through Facebook, Google or Amazon,“which he says have the best ad stacks overall. And for publishers, the only way to monetize inventory comes down to these three as well. We will have entered a truly dangerous world.

Implications in the Online Grocery Wars

The next e-commerce frontier that Amazon is just starting to tap is online grocery sales. Walmart, Kroger, Target and many more are lining up to get a piece of what the Food Marketing Institute (IMF) predicts a $ 100 billion market by 2022 or 2024, after advancing from 2025 when online grocery shopping hits that benchmark.

Tregoe believes too many of Amazon’s competitors are focusing on the logistics, selection, and pricing issues of their online grocery business, but Amazon has it all sorted out.

from amazon The biggest advantage in the online grocery wars is its power to advertise to the core audience: affluent customers who are strapped for time, including but not exclusively its 100 million Prime members, which it has locked down. and loaded.

“Everyone is looking at the left hand logistics, price and delivery but on the right is where Amazon can eat its lunch in terms of catching those eyes cheaply and inexpensively, ”says Tregoe.

“The excuse you hear from the big box guys is that Amazon is only going after the top half of the market, where Prime is targeting, and they are going after the bottom half of the market,»Concludes Tregoe.

That may be true for the next couple of years, but eventually they’ll have to meet in the middle. And when the Walmarts, Targets and everyone else try to get into the market, they’ll have to do it through advertising and Amazon has a huge advantage in that, ”he warns.

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