Why Amazon Ads is outgrowing its own shopping sales

Tech giant Amazon saw revenue for the last quarter hit $127.4bn, a 9% growth compared with the $116.4bn reported last year.

Profits at the Seattle-based company were reported at $3.17bn, also higher than the $2.24bn industry analysts had expected.

By comparison, Meta reported $28.6bn in quarterly revenue and a profit of $5.7bn, while Google parent company Alphabet’s revenue was $69.8bn.

So, how has Amazon become the leader of someone else’s race?

Ads business grows 23% year-on-year

For years, Amazon’s strategy has been to enable advertisers to promote their products on Amazon. But over the past couple of years, relatively under the radar, it has begun expanding its advertising business by serving ads on external sites.

In 2022, Google and Meta’s share of digital advertising revenue in the US fell below 50% for the first time in years. This decline was largely due to the rise of Amazon, which captured over 11% of all digital ad purchases.

For this year’s earnings reports, Amazon is giving its advertising business its own line item rather than lumping it into the “other” category. Amazon Ads saw revenues jump 23% year-on-year to $9.51bn.

By comparison, YouTube advertising revenue was $6.69bn for the first quarter and Google’s search business made $40.36bn and ad network $7.50bn in revenue for the first quarter.

In a statement, Amazon’s CEO, Andy Jassy, said: “There’s a lot to like about how our teams are delivering for customers, particularly amidst an uncertain economy”.

The company has also benefited from the company’s investments in machine learning, Jassy said. While business customers are spending “more cautiously” on cloud services, he added, Amazon’s storage and machine learning services would provide “much growth ahead”.

“Our Advertising business continues to deliver robust growth, largely due to our ongoing machine learning investments that help customers see relevant information when they engage with us, which in turn delivers unusually strong results for brands,” Jassy added.

Data clean room enhancements and Pinterest partnership

Amazon also recently announced an update to its clean room solution, launching Amazon Marketing Cloud (AMC) Audiences globally.

AMC is billed as a secure, privacy-safe clean room in which advertisers can combine their own inputs with Amazon signals to create a full picture of customer journeys across channels and buying stages. Within AMC Audiences, brands can create and update their Amazon DSP audiences and activate them with just a few clicks.

Last week, Pinterest announced a multiyear strategic ad partnership with Amazon to make the e-commerce giant Pinterest’s first partner on third-party ads.

E-commerce business reports no growth

In April, Amazon warned that shoppers have become more conscious about their spending and are trying to save costs when they can.

In contrast to its ad sales business, Amazon sales have been sluggish as shoppers return to in-store spending after the pandemic and have tightened budgets in response to rising living costs. As a result, the company reported no growth in its online retail business.

Despite coming in ahead of expectations, Amazon said that its AWS cloud unit, which pioneered the market over 15 years ago and maintains a domineering lead over other tech firms, grew by 16% during the first quarter, much more muted than the 37% the company reported a year earlier.

Amazon is currently in the midst of aggressively cutting costs including laying-off 27,000 workers. The size of the firm's workforce has shrunk by 10% since March last year – shedding more than 75,000 employees just since the end of last year.

“The tech giant still has the edge – for now”

Hugh Fletcher, Global Head of Consultancy and Innovation at Wunderman Thompson Commerce and Technology, said the results reflected a shift in customer behaviour and highlighted the opportunities for the company to boost its performance further through its appeal to value-minded shoppers.

“Going forward, ensuring this growth continues will be pivotal to minimise the financial impacts of slow AWS growth,” Fletcher said. “However, the company faces the looming threat of other shopping channels’ growing prominence, which could eat into its market share. Already, 68% of retail leaders are considering creating their own branded marketplace to compete with Amazon's, partially due to the lack of control brands have over the experiences customers receive when using platforms that aren’t their own.

“Social shopping is also becoming more popular globally, which reflects consumers’ desire to shop via new and different channels. But until others can match the customer service, delivery speed and simple returns process that Amazon offers, the tech giant still has the edge – for now.”