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16 January 2020

Amazon moves to cash in on connected TV ad boom via 3rd parties

Recent reports that Amazon is in talks to sell advertising slots through third parties such as Apple TV, Xbox and connected TVs (CTVs) makes absolute sense in the context of its broader strategy to boost ecommerce sales. Until now, Amazon has been selling increasing amounts of ad inventory but just around its own devices, largely Fire TV, which fails to exploit fully the growing reach of Prime Video. While Amazon’s principal strategy around Prime Video is to boost sales of services and products through the site, it also aims to become a significant player in digital advertising and seriously disrupt the current Google/Facebook duopoly there.

Amazon is still a minor player in digital advertising with its total ad revenue for 2019 just short of $10 billion or 3% of the estimated $290 billion total, of which Google took 45% at around $130 billion, yet to be confirmed exactly, and Facebook $70 billion or 24%. But Amazon’s ad revenues are rising fast. The company does not break out ad revenues specifically but these account for nearly all its “other category”, which rose by 45% year on year to reach $3.6 billion for Q3 2019, the latest that has been reported. This rate of gain is likely to be boosted further by the expansion into other platforms and the question is how deep it will cut into Google’s and Fakebook’s market share, noting that China’s equivalent ecommerce player Alibaba is also ambitious and making major gains in ad revenues.

Alibaba’s 2019 ad revenue was $32 billion, ranking number three in the world, followed by China’s other two big tech giants Baidu on $13 million and Tencent just over $11 million, just nudging Amazon into sixth place, all according to eMarketer, as we have not forecast digital advertising specifically.

Amazon is clearly hoping to ride the rising tide of digital advertising in general but more particularly for CTV, which is climbing much faster still and where it hopes to score over Google and Facebook through having more content conducive to the big screen. Digital advertising as a whole is set to double from that $290 million mark in 2019 to $580 billion by 2025, averaging a CAGR of 16% but tapering off slightly later in that period. CTV advertising however will grow at twice that rate as a subsector of digital advertising, with global revenues soaring from $13.8 billion in 2019 to $56.9 billion in 2025, according to our analytics arm Rethink TV in its recent Addressable Advertising Forecast to 2025 Addressable advertising boom across all regions and platforms. This CTV category includes advertising delivered not just to smart TVs but also TV sets attached via a connected box such as a Roku or Apple TV.

On the back of that CTV growth, coupled with expansion into third party platforms, we anticipate Amazon increasing its share of digital advertising from the current 3% to 7% by 2022 and then 11% by 2025, scaling $63 billion by then. It will still be behind Google, Facebook and Alibaba, but overtaking Baidu and Tencent to become what might be considered one of a big four.

It may be Amazon will do even better than that if it succeeds in fully harnessing its main competitive advantage over rivals, its base of subscriber data from its Prime customers, currently about 150 million worldwide, although the company has not disclosed exact figures since revealing it passed the 100 million mark in 2017.

Amazon has two focuses here, firstly to make ads more relevant than rivals by applying machine learning algorithms to its huge customer base, which will improve revenues generated for brands, as well as customer satisfaction. Secondly it wants to become the leader in performance advertising where ads are charged on the basis of measurable success rate rather than just CPM (cost per 1000 impressions) or CPC (cost per click). It wants to harness analytics to execute CPL (Cost Per Lead), which will gain 20% of the ad revenue currently spent on CPM within three years, according to a recent study by IBM.

Then Amazon wants to move onto CPA (Cost Per Action), where advertisers or brands only pay for specific responses such as credit payments or at least placement of orders. In the case of major purchases such as a car or even a house, lesser definitive actions like booking a test drive or a property visit would usually be deemed chargeable.