Amazon Advertising Is Just a Toll in Disguise

• Updated on: 2019-07-16
• Read original article here

Investors are giddy about Amazon.com Inc.'s fast-growing pool of advertising sales, which largely come from merchandise sellers buying commercial messages to make their goods more prominent on Amazon's website.

Calling this "advertising" is true, but also a misnomer that leads investors to imagine a Google-like marketing machine inside Amazon. It's not – or not yet, at least. 

Amazon’s advertising is better understood as an additional tax the company imposes on the millions of businesses that sell through its vast digital mall. It's one more toll extracted from sellers to access the fast lane of Amazon's beautiful freeway for shopping.

Ads may be a justified expense for merchants to access Amazon's hundreds of millions of shoppers, and it's a common business tactic to juice revenue. But it's also risky for Amazon to milk its merchants for a higher effective commission than most businesses of its kind can command. And as regulators and politicians  question whether the superpowers of U.S. tech are using their popular services to unfairly advantage themselves, Amazon may pay a cost in reputation the more it squeezes cash from its hold on online shopping. 

More than half the items bought on Amazon come from independent merchants that sell slacks or bocce sets through the e-commerce king. Amazon in some cases handles a lot of the leg work, in exchange for commissions and other fees. In recent years, Amazon has given those “marketplace” sellers and product manufacturers more options to buy Google-like advertisements, in part based on product searches, for an additional cost. 

Someone typing "dog beds" into Amazon’s search box, for instance, might first see results from the FurHaven brand or a merchant that resells pet products on Amazon, with an icon that notes those listings are "sponsored." RBC last year estimated that about one out of every six product results on Amazon’s app was a sponsored listing. Products from companies without paid listings are pushed further down the page.

As Amazon kicks off its annual Prime Day fake shopping holiday, it appears the company is offering even more paid product promotions. All those advertisements make up most of Amazon's $11 billion yearly sales in a category that also includes fees for its branded credit cards. 

In my conversations with businesses that sell products on Amazon or advise merchants, there isn’t much hostility about Amazon charging them for promotion on top of other fees. Companies realize that paying to make their merchandise front and center on Amazon is a cost of doing business, and they generally say those paid placements generate enough sales to justify the expense. In a survey of businesses that sell on Amazon, the merchant services firm Feedvisor found three-quarters of respondents were satisfied with Amazon’s advertising platform. 

Ads, of course, also transfer money from merchants to Amazon's wallet. The company on average takes about 26 cents of each dollar of transactions made by its marketplace vendors, according to Bloomberg Opinion estimates from Amazon's disclosures. Add in an estimate of Amazon's revenue from the merchants’ advertising – which, again, is mostly an added fee paid by goods sellers and product manufacturers as a cost of doing business – and Amazon's average haul per transaction likely tops 29 cents on each dollar. In 2015, the company's take was closer to 20 cents. 

Other marketplace businesses that connect sellers with customers – eBay Inc., Airbnb Inc. and Grubhub Inc., for example – tend to take an effective commission of 15% to 25% on each transaction, including advertisements if available. Consider that some makers of apps, including Spotify and the company behind the the Fortnite video game, have complained that Apple Inc.'s up to 30% commission on transactions in its iPhone app store is far too high. 

Amazon itself doesn’t sell its e-books, movie downloads or other digital goods in the company's iPhone apps, to avoid giving Apple a cut of 30 cents on every dollar – about what Amazon takes from its merchants.

And all advertising is, in a way, a toll levied by a powerful distributor. Businesses buy ads on Facebook and Google to ensure their products and services don't get drowned out by a sea of other information. Frito-Lay pays a supermarket extra to ensure its chips are on visible spots on shelves. Alibaba and eBay sell ads similar to those that Amazon offers to merchants. There's nothing particularly unusual about what Amazon is doing in carving out room for merchants to market themselves, for a fee.

But there is also something perverse about paying Amazon a kind of  tax to make sure your product is seen on Amazon, so people will buy the item on Amazon. Even Google’s ad empire isn’t this kind of a closed loop. And if one Amazon merchant doesn't purchase an ad, one of its competitors’ dog beds – or Amazon's own brand – might instead nab an eye-catching display and wrest a sale instead. Amazon is just different, in a way that makes typical business tactics a little icky. 

Amazon's growing cut from its merchants is one reason why the company's revenue is increasing more quickly than its merchandise sales. Amazon is extracting a bigger share for itself. Like other powerful tech companies, Amazon is able to charge more to the partners that rely on it, because they don't really have a choice.