What Amazon's ad revenue slowdown could mean
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Amazon’s advertising revenue reached $2.7 billion in Q1 2019, up 36% year-over-year (YoY), per the company’s Q1 2019 earnings released last Thursday. Although still a healthy figure, the ad business’s YoY growth rate significantly decelerated in the quarter compared with its growth rates last year.
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In Q1, advertising contributed about 4.5% of Amazon’s total net sales ($59.7 billion), compared with leading segments online stores (49%) and third-party seller services (19%).
The deceleration knocks advertising from its top spot in terms of Amazon’s fastest-growing segments, as it’s now second to Amazon Web Services (AWS), which was up 42% YoY in Q1. In recent quarters, advertising had been Amazon’s fastest-growing segment by far. In the previous three quarters, it posted YoY growth rates of 97% (Q4), 123% (Q3), and 129% (Q2).
Amazon’s ad business is still reasonably young, so it’s unlikely that ad revenue growth is slowing down because it’s maturing — but it could be hitting a stumbling block. Amazon’s ad business got off to a searing start. Amazon CFO Brian Oslavsky characterized it like this on the investor call: “We’re early on in this venture. It’s having a lot of pickup.”
While it’s not yet a trend, the growth dropoff signals something has changed among advertisers — here are a few possible explanations:
- Amazon could have already attracted most of the ad dollars from enthusiastic brands. The ad business might not be maturing overall, but it’s possible many of the early-adopters of Amazon’s initial ad offerings — mostly its Sponsored Brands and Sponsored Products display ads that appear at the top of product search results — have already shifted spend to the platform, and are unlikely to significantly increase that spending in the near term. These brands, along with more skeptical advertisers who have yet to commit to the e-tailer, could be waiting to see if returns materialize before spending more.
- Some brands might be reluctant to commit spend until new products are proven effective. Amazon has been heavily — but quietly — building out ad offerings for marketers, with several new ad products popping up in recent months, like ads on IMDb’sFreedive, for instance. As Amazonpumps out ad products— some of which could have less clear value propositions than its display ads, and all of which are as-yet untested — brands could be hesitant to commit budget.
- Amazon’sreported reticence to provide data around the performance of ad products likely isn’t helping the situation. It’s possible that Amazon’s expanded slate of offerings helps reignite growth, but a reacceleration will be contingent on the e-tailer convincing brands to experiment with the new offerings in the first place. The easiest way for it to do that is to leverage its data to guarantee transparency into ad performance.
Despite the slowdown, we believe that Amazon remains a credible threat to the duopoly. While we don’t expect Amazon to surpass either Google or Facebook in share of the digital market anytime soon, we do still expect it toeat into their ad dollars due to its ability to drive purchases.
As Amazon gets savvier at dealing with the advertising community, simplifies the buying process, and continues expanding offerings, we expect it to draw greater interest from a greater variety of advertisers, and higher spend commitments too.
So far, the e-commerce giant has shown a willingness to listen: After many brands complained about its ad business beinghard to navigate, Amazon to consolidated its varied advertising units under a single umbrella, Amazon Advertising. The move enabled brands to manage their campaigns from a single place.
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