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Amazon setting its sights on the US$88b online ad market

It's quickly gathering momentum in this new, highly profitable arena in an attempt to rival Facebook and Google

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With its wealth of data and analytics on consumer shopping habits, Amazon can put ads in front of people when they are more likely to be hunting for specific products and to view them positively.

New York

VERIZON does not sell its mobile phones or wireless plans over Amazon. Nor does it offer FiOS, its high-speed Internet service. But Verizon does advertise on Amazon.

On Black Friday in 2017, when millions of online shoppers took to Amazon in search of deals, a Verizon ad for a Google Pixel 2 phone - buy one and get a second one half off - could be seen blazing across Amazon's home page. And on July 16, what Amazon calls Prime Day, an event with special deals for its Prime customers, Verizon again ran a variety of ads and special offers for Amazon shoppers, such as a mix-and-match unlimited service plan.

Amazon, which has already reshaped and dominated the online retail landscape, is quickly gathering momentum in a new, highly profitable arena: online advertising, where it is rapidly emerging as a major competitor to Google and Facebook.

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The push by the giant online retailer means consumers - even Prime customers, who pay US$119 a year for access to free shipping as well as streaming music, video and discounts - are likely to be confronted by ads in places where they did not exist before.

In late August, some gamers were angered when Twitch, a video game streaming service acquired by Amazon in 2014, said it would soon be no longer ad-free for Prime members unless consumers paid an additional US$8.99 a month for a premium service called Twitch Turbo.

Amazon derives the bulk of its annual revenue, forecast to be US$235 billion this year, from its e-commerce business, selling everything from books to lawn furniture. Amazon is also a leader in the cloud computing business, with Amazon Web Services, which accounts for about 11 per cent of its revenue but more than half its operating income. But in the company's most recent financial results, it was a category labelled "other" that caught the attention of many analysts. It mostly consists of revenue from selling banner, display and keyword search-driven ads known as "sponsored products". That category surged by about 130 per cent to US$2.2 billion in the first quarter, compared with the same period in 2017.

Those numbers are a pittance for Google and Facebook, which make up more than half the US$88 billion digital ad market. But they come with big and troubling implications for those two giants.

Much of online advertising relies on imprecise algorithms that govern where marketing messages appear, and what effect they have on actual sales. Here, Amazon has a big advantage over its competitors. Thanks to its wealth of data and analytics on consumer shopping habits, it can put ads in front of people when they are more likely to be hunting for specific products and to welcome them as suggestions rather than see them as intrusions.

Amazon has sold some forms of advertising for years, including sponsored product listings tied to search keywords on its site, and ads on properties it owns like IMDb and Zappos. The company will also sell advertising spots on the Thursday night National Football League games it livestreams to Prime customers this fall.

But some analysts who follow the company closely say Amazon is now focusing more on advertising, rapidly hiring and building out its capabilities in a business with high profit margins for Google and Facebook.

In turn, brands are increasingly recognising Amazon's vast customer reach, particularly to its more than 100 million Prime subscribers. In a study conducted in summer 2017 by Catalyst, the search and social media marketing company, only 15 per cent of the 250 brands marketers polled felt they were making the most out of advertising on Amazon's platform, and 63 per cent of the companies already advertising there said they planned to increase their budget in the coming year.

Many big brands that sell products on Amazon have increased their advertising on the site this year, including General Mills, Hershey and Unilever, according to an analysis of display ads by the research firm Gartner L2.

But the bigger surprise is the increase in advertising on Amazon by companies such as Verizon, AT&T and insurer Geico that do not directly sell any product or service on the site. In the first half of 2018, Geico ran six times more display ads than during the same period in 2017, according to Oweise Khazi, associate director of Amazon IQ research at Gartner L2. Verizon said the reason for its increased advertising spending on Amazon was simple: It is where the shoppers are.

Last year, jeans-maker Levi Strauss & Co shifted some of its advertising spending away from YouTube to Amazon, where it sharply increased its use of display ads, according to a May report by Gartner L2. In doing so, the company increased the brand's visibility in Google searches, driving shoppers to an Amazon page with Levi's merchandise, the research firm said.

In an emailed statement, a spokesman for Levi's said the company had increased its marketing investment across all channels, including television, traditional digital and newer digital platforms, including Amazon. NYTIMES