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Amazon Prime Day: Pay To Play?
BY DANIEL WU - 17/07/2018 | VIEW MORE ARTICLES BY THE MONTGOMERY TEAM

Today, Australian shoppers are participating in one of the largest shopping events in the world – Amazon Prime Day. Whether the event can help restore Australians’ faith in the Amazon brand remains to be seen, but what we can say for certain is that Prime Day will be as lucrative for Amazon’s nascent advertising business as it is for its retail business.

Amazon, by some estimates[1], is expected to account for half of all US online shopping in 2018, with an even greater share of incremental growth. Such a dominant market share creates an immense advertising opportunity for Amazon, and the company’s path is increasingly taking it on a collision course with the other giants of digital advertising, particularly Google. While social media and search advertising platforms can mine troves of user data to better target their advertising algorithms, only Amazon has such rich data on its customers’ direct purchase intent, and the means to immediately fulfil that intent with one click.

The Financial Times[2]reports that Amazon has been advising merchants to double or even triple their overall ad spending on the platform ahead of Prime Day in order to position their products at the top of the search results. This may seem like a hefty price for merchants to pay to participate in a 36-hour sale event where they sell their products at a discount, but Amazon’s algorithms leave them with little choice. For merchants to win (or keep) their products at the top of the search results and score the coveted Buy Box, not just on Prime Day but for days and weeks afterwards, they need to outbid their competitors for the keywords or else risk losing their rankings on Amazon’s search results.

This incremental ad spending by merchants to effectively stand still in its marketplace is of course good news for Amazon, which currently controls less than 3 per cent of the US digital advertising market. RBC analysts expect Amazon to double its advertising revenue in 2018 and exceed $25 billion by 2022, with an incremental $8 billion in operating profit. This would effectively make Amazon’s advertising business a second Amazon Web Services – a high growth, high margin business that can be used to fund Amazon’s retail and other expansion ambitions.

Sir Martin Sorrell once called Amazon’s advertising business a “pimple” that will grow “violently”. Considering what the AWS pimple, with “only” $4.3 billion operating profit in 2017, has enabled the rest of the business to accomplish, it is no wonder Jeff Bezos keeps publishers and advertisers alike awake at night.

[1]Watch out, retailers. This is just how big Amazon is becoming

[2]Financial Times



View More Articles By The Montgomery Team

Roger Montgomery is the Chief Investment Officer of Montgomery Investment Management, montinvest.com, and author of blog.rogermontgomery.com.

Roger's step-by-step guide to valuing the best stocks and buying them for less than they're worth, Value.able, is available exclusively at rogermontgomery.com. Skaffold is an online stock-picking application that rates ASX-listed stocks from A1 to C5. Watch a demo of Skaffold at www.skaffold.com.



 

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