Advertising is the new high-priced tobacco and vendors are addicted to it
We have to fly high to get a different view of what is happening in the world. I started looking at the revenues of Big Tech companies like Amazon to see where growth is happening.
Looking at the 2018 revenues of Amazon, there are three main businesses lines: e-commerce, cloud computing, and ad revenues. What struck me was that growth came from ad revenues which are `lumped` into a generic category labeled `Other`.
Remember 2015 was the first year that Amazon reported cloud revenues separately, revealing specifics about its AWS business.
Today, four years later, Amazon reports advertising revenues in a category that is named `Other`. According to the GeekWire for 2018, Amazon reported $10.1 billion for the “Other” category. According to Amazon`s financial statements this category “primarily includes sales of advertising services, as well as sales related to our other service offerings”. Fortune reported that in Q1 2019,
Sales in Amazon’s “other” segment, which is mostly advertising, increased 34%, to 2.72 billion. The company’s digital advertising franchise has grown into the third largest in the U.S., trailing only Alphabet’s Google and Facebook, researcher EMarketer estimates.
Let me spell this out loud: Amazon`s advertising business is getting ready to be publicly disclosed as one of the main businesses competing openly with Facebook and Google`s Alphabet. This is important because the top marketplaces are Ad driven and don’t seem to intend to switch from that business model. Actually, it isn’t easy for them to switch to another marketplace business model.
Are you aware that merchants that want to sell on the Amazon marketplace have to compete amongst themselves to reach end customers? That means, paying advertising to Amazon in order to move algorithmically up the ranking on the Amazon marketplace. This is the game that each and every Western Bigtech uses in its closed ecosystem. You have to understand the algorithm and pay to play based on the rules of algorithm; be it Amazon marketplace, Facebook, Alphabet.
This realization makes me think that maybe, I only say maybe, merchants borrow from the SME lending arm of Amazon, to finance their advertising campaigns on Amazon. So, Amazon wins twice. I don’t have data on this, so it is only a conjecture.
We know that the technology is there to launch an e-commerce marketplace that vendors can reach end customers (B2C or B2B) without having to pay high advertising fees and incur costs to play on the platform whether they sell or not. Who can execute on this? We just need one success story of such disintermediation. Will it be in selling books or music or baby formula or online education? Will it happen in the West or the East? Will Amazon dare to cannibalize its e-commerce business at least in one area?
What we do know, is that it won’t happen from Facebook whose business is 98.5% based on advertising and their plans for a Facecoin won’t change that business model. It won’t come from Alphabet either, who earns 15% of revenues from non-google ads but 70% from advertising of the Google family (youtube, gmail etc). Both are Titanics in advertising and can`t disrupt themselves.
Advertising is the new tobacco and merchants are addicted to it
A few days after I published this opinion piece, Business Intelligence put out a thorough report `In The Rise of Amazon Advertising: This is exactly what Amazon is doing to siphon billions of ad dollars from Google and Facebook and why brands love it`
