Will Amazon Eat Google's Lunch?

And then there were three.

That's right, Amazon (AMZN) will join Facebook (FB) and Alphabet (GOOGL) as the last member of the triumvirate dominating the global digital ad industry.

That is what all signs are pointing to.

In a survey conducted by PricewaterhouseCoopers (PwC), the global digital ad industry increased by 21% YOY to $88 billion in 2017.

Of that growth, Facebook and Alphabet commanded 90% of it.

Mobile ad growth exploded last year because of the migration to smartphones increasing by 36.2% YOY in 2017.

Mobile ad revenue accounted for 56.7% of the digital ad dollars.

Search ad growth decelerated from 48% to 46% market share, but overall revenue climbed 18% to $40.6 billion reflecting the preference for older generations to use desktop search as their go-to platform.

Younger generations prefer dynamic video advertising, which suits mobile devices and tablets.

This segment grew 33% to $11.9 billion and is set to eat into search ad market share going forward.

This all bodes well for Amazon, which can take advantage of these various channels to pump through more ads that companies are clamoring to buy on Amazon's e-commerce platform.

Video ads would be ripe for Amazon Prime Video too, Amazon's on-demand media content service.

By 2021, Amazon's digital ad profits will eclipse its cloud profits solidifying Amazon as the best American tech company because of its multitude of premium profit drivers.

As time goes by, the quality of Amazon's company ascends with no restraints.

The Mad Hedge Technology Letter rates Amazon as the best publicly traded tech stock and that will not change anytime soon.

Amazon's digital ad revenue shot up 129% YOY to $2.2 billion.

This growth rate would make any investor drool.

Amazon might want to shift this business over from the "other" line item on its earnings report because it is blossoming into a main engine of growth and profit.

As Facebook and Alphabet have demonstrated, the digital ad game is a high profit, zero sum game, and Amazon is in perfect position to capitalize going forward.

Amazon's e-commerce business is the foolproof platform that can attract digital ad dollars in droves.

Not only are customers already buying products on Amazon.com, but they are usually purchasing numerous items highlighting the suitability of Amazon populating relevant ads to its customers.

Amazon's strategy to sell high-volume, good value for money products fits nicely into the digital ad strategy with plenty of opportunity for ad buyers to roll out ad campaigns to the masses.

Amazon continues to augment its digital ad tech team creating new tools and has now started directly approaching brands directly racking up digital ad sales.

Amazon's gain is Facebook and Alphabet's loss.

If Amazon goes full steam into the ad tech game, it could do what it has done to brick-and-mortar retail - deflate prices.

This is a worrying sign for Facebook, which is already on the ropes after realizing its business model has some major holes.

Alphabet's strategic position is superior to Facebook's, but it is very much still a one-trick ad tech pony.

The attempt to reintegrate a censored version of its Google search into China makes sense when other FANGs are coming for their lunch stateside.

This epitomizes the current tech climate - evolve now or die.

Amazon is working on a new video ad product that it will place in its search results.

This new product is currently in beta testing mode.

These video ads will be 90 seconds or less and will direct customers to a custom landing page or directly to an official website where they can purchase the item.

The video ad will only be shown for users of iPhones and iPads initially.

Amazon is requiring companies to pay a minimum of $35,000 for this new type of ad campaign. Some of its prominent ad buyers such as Procter and Gamble are already testing out this service to curate the perfect video ads to place inside Amazon search.

At first, the inventory for these video ads will be restricted.

Amazon Media Group is the in-house sales team responsible for selling these new products.

For example, in Germany, the habitual Amazon customer carries out a systematic routine to buy Amazon products.

First, customers will perform astute research on potential products and analyze different price points to gain a comprehensive picture of the market using their smartphone.

The customer later adds the desired items into the shopping cart.

At a later date, the customer purchases the item on a different device, and in many instances, mobile is used just to research products when the customer is out and about.

This multi-leg buying process gives Amazon multiple chances where it can fit in some video ads for the customers.

It is true that the minimum $35,000 will make it harder for small businesses to compete, but this is tailor-made for larger companies to offer a compelling case to customers while leveraging their brand awareness.

It is entirely possible that Amazon will surpass $8 billion in digital ad revenue in 2018 and then blow by $16 billion by 2020.

Of that $16 billion in revenue, $12 billion could be booked as operating profit showing off the juicy margins that make this industry so attractive for the neutral observer.

Yes, Amazon has the largest and best product search engine in the world, and it's time to start leveraging this asset to drive monetization growth.

Specifically, the ability for customers to click on an ad and be shuttled over to Amazon.com for final purchase.

This is the x-factor missing out on Facebook and Google search models.

Amazon has the capability to cherry-pick revenue from each part of the process up until the delivery to the door.

This opens a slew of extra revenue down the road as it enhances the shopping experience because Amazon has full control over the whole process.

This runs parallel with Amazon changing how its ad tech operates to accommodate the emphasis on generating huge growth numbers in ad volume and sales.

Small ad buyers usually work through an agency to integrate with Amazon while larger ad buyers work with Amazon's in-house team.

In the next few weeks, sponsored websites outside of Amazon's ecosystem will start advertising to shoppers who are able to click a link directly moving the buyer back to Amazon.com.

The sponsored ad route is a direct shot at Google search and Facebook.

Unsurprisingly, Amazon converts sales at a 350% higher rate than Google, underscoring the effectiveness of digital ads for Amazon.

When customers are already on the Internet to shop, shoppers could do a lot worse than clicking on a direct link funneling them to Amazon.com.

Posting baby photos on Facebook is not likely to convert users into product buyers.

Neither is checking your Gmail account, translating foreign language on Google Translate, or using Google Search to populate results usually not related to shopping.

These methods fail to convert an Internet surfer to product buyers to the detriment of Facebook and Google search.

Amazon has the perfect business model for selling digital ads.

This robust ad business will spur Amazon shares more than $2,000, and the quality of the sum of the parts keeps rising.

Execution is the only roadblock. And as most of us know, Amazon is one of the most innovative and cleanly executed companies in the world with visionary strategists.

That is why it is Amazon.

 

 

 

________________________________________________________________________________________________

Quote of the Day

"What's dangerous is not to evolve." - said Amazon founder and CEO Jeff Bezos.