Ad giants boost Amazon's ad business (AMZN)

BI Intelligence

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WPP, Omnicom, and Publicis — three of the world’s biggest ad companies — will collectively spend more than $800 million to advertise on Amazon over the next several years, according to agency executives, per The Wall Street Journal.

As a result, Amazon could become a more formidable challenger to behemoths Google and Facebook, which currently capture the lion's share of digital ad revenue.

Below is a breakdown of how each ad giant plans to increase its ad spend on Amazon:

• WPP, the world’s largest ad company, will spend around $200 million on Amazon in 2017, according to CEO Sir Martin Sorrell. This figure could increase 40-50% in 2018, according to an executive familiar with the matter, per The Wall Street Journal.
• Omnicom, the world’s second-largest ad company, spends $100 million with the e-commerce giant, and this figure could double annually in the years to come.
• Publicis, the world’s third-largest ad company, spends $200 million with Amazon, and plans to increase this figure roughly 50% to $300 million in 2018.

Here are two key factors that differentiate Amazon’s ad business from the duopoly's, and are likely major drivers for increased advertiser interest:

• Amazon’s e-commerce dominance means consumers visit its website with the intent to purchase. This means ads on its platform, versus Google's or Facebook's, may be more likely lead to product purchases. Additionally, although Google holds the largest share of the search engine market, Amazon is the most popular destination for customers searching for products online, according to a Q1 2017 UPS survey. Also, Amazon’s e-commerce business allows it to directly attribute more e-commerce sales to ad campaigns than Facebook and Google.
• Amazon has a brick-and-mortar presence that gives it in-store data Google and Facebook don’t have. Amazon-owned Whole Foods has about 400 nationwide locations, giving it access to certain consumer shopping preferences that Google and Facebook are missing out on, as e-commerce transactions don’t provide customers' full purchasing profiles. US e-commerce represented 8.5% of retail sales in Q1 2017, pointing to the advantage of having a brick-and-mortar business in capturing a share of sales that aren’t occurring online.   

However, Amazon’s ad business is still a long way off from reaching the size of the duopoly’s. The sum of Amazon’s search, display, and off-platform 2017 ad revenues is in the low single-digit billions, according to Magna Global estimates. In comparison, Google and Facebook generated roughly $24 billion and $10 billion in ad revenue, respectively, in Q3 2017. Nonetheless, Amazon is still on its way to measuring up to these digital ad giants, and the company’s e-commerce dominance will likely help it sustain ad growth in the years to come.

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