For Amazon the largest part of its revenue still comes from retail, but some growth potential could lie in the overlooked income stream of advertising.
The advertising revenues have recorded the highest growth rate of all income streams, namely retail sales, subscription and web services.
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Advertising revenues have been an untapped market so far for Amazon, but the likelihood of breaking the duopoly of Google and Facebook in digital advertising is growing as the company is set to leverage its subscription base.
Advertising revenues remain an untapped source of income for Amazon
Advertising revenue for an e-commerce company is crucial not only as a source of revenue, but it has a multiplicative effect on sales growth by expanding reach to consumers over new products.
Amazon’s advertising revenues reached $4.65bn in 2017, a 62 percent year-on-year increase, but this still represented only 2.6 percent of revenues.
Meanwhile, the global internet advertising expenditure is growing at a strong pace; according to the Interactive Advertising Bureau (IAB) it reached $40.1bn in the second quarter of 2017, recording 22.6 percent year-on-year increase so there is market share to be had.
Advertising revenues to become focal point of Amazon’s strategy — the expansion of Amazon Prime serves that purpose
Amazon has already intensified its efforts to capitalize this opportunity by developing its Amazon Marketing Services platform.
Its potential is great taking into account that its website is a widely popular product search tool among consumers, and its access to consumer data both from desktop and mobiles.
It is expected that Amazon is going to leverage its Prime subscribers, through whom there is greater potential for personification of ads, especially given the fact that Prime subscribers are bigger spenders compared to non-subscribers.
Amazon’s focus on growing its Prime subscriber base outside the US, after the recent launch of the service in the Netherlands, Belgium and Mexico, enhances that growth potential of advertising revenues.
In addition, advertising clients of FMCG products are key for Amazon’s advertising revenue growth, as these clients are a vast and stable source of advertising income.
Accordingly, the expansion of Amazon Prime Now service in the US and major European countries, is going to offer valuable synergies for this purpose.
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The balance of power in the advertising industry is in favour of Amazon
Google and Facebook almost comprise a duopoly as platforms for digital advertising.
Under these terms, even advertisers would be grateful seeing Amazon becoming a third large player in this market as that would increase competition and suppress ad costs.
The three largest advertising groups Publicis, WPP, and Omnicom have already revealed plans to substantially increase their advertising expenditure with Amazon.
In this regard, Amazon could possibly undercut on advertising costs, as it does in its core retail operations, in order to increase its advertising expenditure market share, disrupting competition in the digital advertising industry.