Amazon and Advertising

Two posts in two weeks – nice!

Having received multiple recruiting calls over the past year or so, I’ve been watching Amazon’s foray into the advertising business with interest.

Let’s start with a nod to the fact that, in many ways, Amazon’s situation is very similar to the Facebook network opportunity I wrote about two and a half years ago.  In the following quote, I’ve replaced ‘Facebook’ with ‘Amazon’ – and I think the resulting passage sums up the situation nicely:

With regards to [monetizing all that beautiful data], one potential method would be to buy oceans of crap inventory at, say, a $0.50 CPM, add data, and resell it at a $5.00 CPM or higher, keeping the spread, or value creation, or whatever you want to call it.

With that goal in mind, the strategy and tactics become very interesting. Look at this situation through the lens of the emerging trends in DSPs. Where does [Amazon], as data provider, fit? Do they monetize by injecting their data into other DSPs directly? Do they aggregate other inventory, add their data, and sell the finished product to DSPs? Or perhaps, they form a DSP of their own with the [Amazon] data at the core?

Amazon has chosen the last option, essentially forming their own ad network using licensed or home-brewed advertising technology whose sole purpose is to monetize all of the fantastic data that Amazon captures from its customers every day.  Bottom line: Amazon is doing what I thought Facebook should have done years ago.

And I love this strategy.

Back in business school, one of my favorite instructors taught us how sustainable advantage could be created by engaging in activities that were mutually beneficial (‘tightly interdependent’) to each other.  And I think Amazon has done just that:

  • Amazon’s retail business yields not only profits, but tons of data (purchase histories, purchase intent, customer identity, etc)
  • Amazon’s cloud business gives them the ability to analyze and crunch that data at scale.
  • Amazon’s loyalty programs (especially it’s diabolically addictive free shipping program, Prime) virtually guarantee that they see (at the very least) a search intent signal for almost everything I buy, if not the purchase outright.
  • Amazon’s advertising business allows them to monetize this data via online marketing, while presumably driving additional sales to their retail operation.
  • Amazon’s supplier relationships (major OEMs and smaller Amazon merchants) provides  existing pathways through which to drive advertising revenue.
  • … and I’m sure a bunch of other aspects that haven’t occurred to me yet.

In essence, all of this stuff seems to hang together very well, and to a far greater degree than a cursory inspection of the above assets would have yielded (at least for me).

And this brings me to my final point.  Monetization of first party data assets – whether that data is owned by Amazon, Facebook, Google, or any other company for that matter – is going to be an incredibly important question over the next few years.  When all is said and done, I think it will be abundantly clear that companies cannot achieve competitive advantage using commodity data available to everyone.  Such activity is, at best, temporary market arbitrage.  Instead, companies who can harness their own proprietary data in a profitable and privacy-safe manner will prevail.  More on this later!

One thought on “Amazon and Advertising

Leave a Reply

Your email address will not be published. Required fields are marked *