Amazon easing into $1B sideline business: ad sales [The Seattle Times :: ]
(Seattle Times (WA) Via Acquire Media NewsEdge) March 18--In a little more than a decade, Google has upended the advertising world, giving Madison Avenue detailed insight about who is clicking on ads and how often.
You think Google knows what you want? Try Amazon.
The data the retail giant collects on its 237 million active customer accounts -- and its careful mining to target markets -- puts Google to shame. Amazon.com doesn't just know what folks have searched for; it knows what they bought.
And using that data, as well as ginning up other ways to get marketers to spend their money, has turned Amazon into one of the Web's ad juggernauts, the seventh-largest seller of digital ads worldwide, according to eMarketer, which tracks online advertising. It's already generating more ad revenue than Twitter, Pandora and LinkedIn, and Amazon is on pace to sell nearly $1â€‰billion worth of ads this year.
As big as Amazon's ad business already is, it could be much larger. The data that Amazon collects gives it the ability to see patterns Google and most of its other ad rivals could never find. Amazon can connect dots when a shopper buys diapers, baby food and formula in successive weeks. It has the ability to know that the shopper is likely a new mother and also know that her diaper supply typically runs out every two weeks.
That's data nirvana for advertisers.
But here's the interesting part: Amazon, which has disrupted everything from bookselling to the consumer-electronics business, is stepping gingerly into digital advertising. The company won't share the most coveted of its data with advertisers for fear of alienating shoppers.
"Customer trust is paramount to us," said Lisa Utzschneider, vice president of global advertising sales at Amazon Media Group. "We would never do anything to infringe on that trust."
The math is pretty simple. While advertising is becoming a significant business at Amazon, it pales in comparison with the $70.5 billion that Amazon generated last year selling diapers, DVDs, televisions and other merchandise from its various websites, as well as from digital media such as electronic books. Amazon executives know that targeted advertising has the potential to unnerve shoppers, who may feel squeamish about ads that seem to know too much about their shopping habits.
Make no mistake, Amazon recognizes the potential gold mine on which it sits. For a company that generates skimpy profits and is willing to endure long-term losses to establish new businesses, the high margins of advertising offer a tantalizingly lucrative financial cushion. Profits from ad sales can help finance the company's riskier bets.
Amazon has another advantage over Google, Facebook, Microsoft and other bigger online ad rivals: Consumers visiting Amazon are more likely ready to pull out their credit cards and buy. That makes Amazon's ad space far more valuable.
Testing the waters
That's why Amazon hasn't turned its back on advertising. The company has been aggressively experimenting, tapping its vast online network of websites in search of new, high-margin revenue that won't alienate shoppers. Amazon even believes the precise targeting of ads meshes with its goal of providing a place for customers to find and purchase anything they might want online.
"We aspire to create relevant, meaningful experiences for our customers through advertising," Utzschneider said.
The idea of ads being meaningful might seem more than a bit far-fetched to shoppers. For many, online ads are, at best, ignored. At worst, they get in the way of what people are trying to accomplish.
Amazon hopes to avoid that by offering some of its trove of customer information to advertisers. It uses browsing and shopping data, for instance, to put customers into aggregated and anonymous demographic buckets for advertisers to target.
So a customer who buys a flat-panel Samsung television and a Sony PlayStation 4 game console and searches for other tech devices could be categorized as a "Gadget Geek." Another customer who has picked up a Vince Camuto sweater and a pair of Steve Madden boots would fall into the "Fashionista" bucket. Advertisers could then target those customer groups.
Amazon also can provide data that indicate when shoppers seem to be closer to purchasing items.
There's little doubt advertisers want more, and that Amazon is leaving money on the table by not using customer shopping data more aggressively.
"It's absolutely stunted their growth," said David Selinger, chief executive and co-founder of RichRelevance, a data analytics and personalization firm.
But Selinger, who worked at Amazon a decade ago and led some of the company's earlier forays into the ad business, said the business is growing fast enough to resist Madison Avenue's demands for more data.
"That's why they don't feel the pressure to break those rules," Selinger said.
Advertisers aren't the only ones pressuring Amazon. Wall Street would love to see Amazon milk more profits from advertisers. The fat margins from ad sales could help mitigate the cost of Amazon's relentless retail strategy of squeezing rivals with low prices and cheap shipping.
"If Amazon is going to hold the line on margins and continue to subsidize shipping, you'd like to see them pull the high-margin levers they have at their disposal," said Robert W. Baird & Co. analyst Colin Sebastian. "Advertising is a big one."
And it's not just about subsidizing the retail site. Amazon is using ads in its device business, too. It's able to undercut the pricing of Apple's iPad by offering a version of its new Kindle Fire HDX with "special offers" on its lock screen.
"Advertising helps us invest in other businesses at Amazon," Utzschneider said.
The company doesn't disclose revenue generated from online ad sales. But eMarketer estimates Amazon sold $718.3 million worth of ads worldwide last year. What's more, eMarketer expects Amazon's ad business to grow 33.5 percent in 2014, generating $958.5 million. That could put it close to AOL, which sold $1.1 billion in online ads last year, but with growth of less than 6 percent.
To get there, Amazon has been working on novel ways to separate marketers from their money. The company has even been tapping its offline operations, selling space on the sides of its Amazon Fresh delivery trucks. It's testing ads on Amazon Lockers, the parcel-pickup sites scattered around urban areas.
Foray into video
One of its most ambitious bets: video ads that show up before pilot episodes Amazon Studios released a month ago. When viewers click to watch one of the 10 new pilots Amazon is testing for Amazon Prime Instant Video, the company's Netflix-like subscription service, they have to sit through an ad from Geico.
(The ads run only for the pilots, which anyone can watch. Amazon Prime Instant Video is otherwise ad-free.)
The Geico ads mark Amazon's most visible foray yet into video advertising. While the company has no plans to sell ads for Amazon Prime video programing, the pilot ads give marketers something they crave: premium online content.
"Amazon is doing something new and smart and innovative," said Niki DeCou, director of digital strategy at Horizon Media, Geico's media agency.
And Amazon is expanding video ads on its retail site, too. In February, the company cut a deal with FreeWheel, which inserts targeted video ads into such places as video-game trailers. (Earlier this month, Comcast agreed to buy FreeWheel for $360 million, according to a Reuters source.)
The Geico ads don't direct buyers to Amazon's sites; Amazon doesn't sell insurance. But Geico was keen to target Amazon's customers, who it sees as the tech-savvy prospects willing to buy its policies online.
"Both companies appeal to a consumer who is willing to take control of the shopping experience," said Ted Ward, Geico's vice president of marketing.
Amazon also has tinkered with its crown jewel -- the amazon.com site -- to generate ad sales. Last fall, it created a shopping page for the new Nissan Versa Note that offered details on all of the car's features, from optional fog lights to energy-absorbing steering column. Shoppers can scroll over pictures to see eight different color options.
The one thing shoppers can't do, though, is buy the car from Amazon. In the spot where consumers typically click to add an item to their cart, Amazon has placed a "Visit Versa Note" box, which takes shoppers to Nissan's website. There, they can connect to a nearby dealer.
Nissan gave $1,000 Amazon gift cards to the first consumers who bought the $13,990 car and who started the process from the site. And the carmaker delivered the first car on the back of a flatbed truck inside a box with Amazon's logo on the side. That delivery was noticed by a Reddit user, who posted photos on the social-media news site that quickly went viral.
"We were looking for a stunt that was edgy and fun when we were launching the Versa Note," said Erich Marx, Nissan director of interactive and social-media marketing.
Marx declined to provide details about sales generated from the promotion. But he said Nissan converted leads from the Amazon site into sales at a much higher rate than more conventional marketing channels.
"It took three days to get to 100 Versa Note leads. We thought it would take three weeks," Marx said.
Jay Greene: 206-464-2231 or email@example.com. Twitter: iamjaygreene
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