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A little known part of Amazon is growing fast — and directly competes with Google and Facebook (AMZN)

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A little known part of Amazon is growing fast — and directly competes with Google and Facebook (AMZN)

According to Amazon’s latest earnings, the
“other” revenue from its North America business — believed to be mostly
comprised of its online advertising sales — saw the biggest
year-over-year jump of any part of Amazon, at 60% in 2016. It recorded
$1.3 billion in annual revenue. Although that’s tiny compared to Google’s $80 billion in ad revenue,
it shows Amazon has been quietly ramping up its online advertising
offerings, and could one day be a major threat in the industry.

In fact, during Amazon’s earnings call with investors on Thursday,
UBS analyst Eric Sheridan pointed out this growth, asking where the
company sees its advertising business going longer term.

Amazon’s CFO Brian Olsavsky didn’t share much, stressing it’s “very
early,” but did agree its online advertising business is a “good
strategy” for the company.

“Our goals there are to be helpful to customers and enhance
their shopping and viewing experiences, mostly with targeted
recommendations. We think that’s a good strategy rather than invasive
things that take away from the shopping experience,” Olsavsky said
during the call.

Olsavsky also said “sponsored product” ads are “off to a great
start” and a “very effective way” to reach interested customers, while
adding the company’s working on some pre-roll video ads as well.

“For the most part, we like the progression. We are balancing
customer experience with advertising at all times, and we like the team
that’s working on it,” he added.

Overlooked part of the business

Although Amazon rarely talks about its sprawling advertising
business, there’s been some speculation that it could end up becoming a
major part of the company’s overall business.

UBS’s Sheridan wrote in a recent note that Amazon is continuing to
expand its marketing platform by offering more “sophisticated and
targeted” advertising solutions, although its revenue is still small.

“We believe the long-term potential of Amazon’s advertising business
is still largely overlooked despite Amazon’s large reach (over 300m
active customers),” Sheridan wrote.



According to Bloomberg’s Shira Ovide and Leila Abboud,
Amazon’s ad business is estimated to have generated roughly $1.2
billion in 2016. If you apply Facebook’s operating margin, Amazon’s ad
business would have made $395 million in operating income last year, a
solid 18% of Amazon’s total operating income.

During the earnings call, Darin Manney, Amazon’s head of IR,
cautioned against making a big deal out of the jump in “other” revenue,
stressing that it includes revenue from its co-branded credit card
arrangements and other types of advertising deals.

Still, Amazon seems to be drawing a lot of attention from industry big wigs, including WPP CEO Martin Sorrell, who, according to Bloomberg, recently said: “The company that would worry me if I was a client — or I think worries our clients, more than Google and Facebook — is Amazon.”

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