Amazon’s advertising business is a star. But where are the details?

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For the big internet companies that make their living selling advertising, these are tough times. As happens with any kind of economic slowdown, businesses are quick to cut back on advertising spending. However, for Amazon.com Inc., whose e-commerce business is collapsing, the ad is proving to be a bright spot.

Well, relatively speaking. Just as with Amazon’s digital advertising rivals, the company’s ad revenue growth rate slowed in the second quarter to 18 percent from 32 percent in the fourth quarter before the recent slowdown began, Amazon said Thursday. But it’s still moving down the highway at a decent speed compared to some other digital advertising companies. Meta Platforms Inc.’s ad revenue, most notably, slowed to minus 1.5 percent in the second quarter from 20 percent in the fourth quarter. Even Google’s ad revenue slowed to 11.6% in the quarter from 32.5% in the fourth quarter.

And compared to the rest of Amazon’s business — aside from Amazon Web Services, investors’ favorite business — advertising is the star. Ultimately, online sales fell 4% in the quarter. Also, given the high-profit nature of advertising, the business is likely now a key driver of a company’s bottom line. AWS operating earnings of $5.7 billion offset losses of $2.4 billion in the rest of Amazon. But without advertising, the rest of Amazon would lose a lot more money.

Having said all that, it’s important to recognize that a lot is unknown about Amazon’s advertising business, which makes assessing its growth prospects and true profitability difficult. Investors deserve more clarity on this.

For example, how much of the $8.7 billion in advertising in the second quarter was driven by merchants who sell their wares on Amazon’s marketplace and want to secure prominent placement? It is not clear whether these traders do it willingly or happily. A 2020 congressional report on competition in digital marketplaces cited evidence that “Amazon may require sellers to buy their advertising services as a condition of making sales on the platform.” (An Amazon spokesperson denied that merchants who sell on Amazon’s marketplace are required to buy advertising.)

One potential reason for investor concern is that any kind of regulatory action against such practices could reduce Amazon’s advertising revenue. Another, related point: Amazon’s search results have become so cluttered with ads that the company risks alienating shoppers looking for actual results.

However, there is no doubt that Amazon is an increasingly successful advertising platform. People in the ad industry say Amazon is seen as an effective place for brands to buy ads. The abundance of data about what consumers shop for means that advertisers can target their ads exactly to the customers they are trying to reach. Other retailers have built similar advertising businesses with some success. Indeed, GroupM, the world’s largest media buyer, says its biggest packaged goods customers have increased spending on what it calls “retail media” — Amazon and Walmart Inc.’s websites. and Target Corp. – up to 12% of their total US ad spend in 2021 from 3% in 2019.

Additionally, Amazon doesn’t just sell ads on its marketplace, it also sells other properties, such as its video streaming service Freevee and its gaming site Twitch. And it sells ads to websites it doesn’t own on the Internet, just like Google does. Unlike Google, however, Amazon doesn’t disclose details about how much of its revenue comes from which bucket.

This is important for understanding revenue profitability – and even how much revenue Amazon actually keeps. When Google or Amazon sell ads on properties they don’t own, they only get a portion of the revenue. Google discloses what it shares with these other properties. It’s not clear from Amazon’s disclosures exactly what it reports – net or gross ad revenue. Another thing: selling ads on Freevee can’t be as profitable as selling ads on Amazon’s marketplace, given the cost of producing or licensing programming for the service. So how much ad revenue does Freevee contribute to the total?

It’s time to stop talking about the digital ad market as dominated by two companies, Alphabet Inc. and Meta. Amazon’s share of the U.S. digital ad market is expected to reach 12.6 percent this year, Insider Intelligence estimates, compared with 7.7 percent in 2019. Meta and Google, which had a combined 55.2 percent share of market in 2019, this year they will take 50.5% %. And given that Meta’s ad revenue is likely to shrink over the next 12 months, Amazon’s share looks likely to grow during this downturn. As encouraging as this is for investors, however, it’s time for Amazon to provide clearer disclosures about the nature of its advertising business.

This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Martin Pearce is a Bloomberg Opinion columnist covering technology and media. Previously, he was deputy editor of the Wall Street Journal’s Heard on the Street column and managing editor of Information.

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