Several big ad agencies more than doubled their spending on Amazon (NASDAQ: AMZN) last year as the company ramped up its advertising business. The banners atop search results and sponsored listings within search results grew increasingly common. Amazon doesn't break out its ad revenue, but its "other" revenue line item, which consists mostly of advertising, more than doubled in 2018, to $10.1 billion.
Most of Amazon's revenue growth is coming at the expense of another digital advertising giant: Google, the Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) company. The majority of the increase in Amazon ad budgets came from Google search ad budgets at some of the biggest ad agencies, according to a report by The Wall Street Journal.
Should Alphabet investors worry that Amazon is eating its lunch?
Why Amazon search ads are so popular
If someone is searching for a product online, they're probably searching on Amazon.com first. Various surveys pin Amazon's share of product searches between 41% and 54% last year. Each of those surveys say Amazon attracts a larger share of product searches than Google.
Amazon isn't just a place to buy products online, it's a place to research them. Its trove of reviews and detailed product information gives consumers all the information they need to make informed buying decisions. That makes it a better product search engine than Google. And if an advertiser can get a product at or near the top of Amazon's product search listings, consumers will consider that product.
Beyond the volume of searches going to Amazon, the online retailer also offers better attribution capabilities than Google. Amazon can see a customer all the way from ad impression to click to cart and to purchase. That gives advertisers a better understanding of their return on investment and they like what they see. Amazon's ad prices have skyrocketed in recent months as advertisers continue to see strong returns on their ad spending.
Does Google need to worry?
Amazon is starting to take a big share of the lucrative U.S. search advertising market. Google is still absolutely dominant, however, taking 78% of the market last year, according to research firm eMarketer. The firm estimates that Google's share could slip to just 71% by next year, however, largely because of the growth of Amazon search ads.
Omnicom Group said 20% to 30% of its search ad spend for clients went to Amazon last year. As more advertising agencies or small business marketers follow suit, Google's share of search ad dollars will continue to shrink.
But Google's core business is still very healthy. Even as it cedes market share to Amazon, its search ad revenue is expected to climb 17% this year. That's because ad budgets are shifting from legacy platforms like print and television to digital.
Amazon is only taking away ad revenue for products sold on its marketplace. Amazon doesn't sell insurance products, legal services, or cars (yet), which can be very lucrative search topics for Google.
Furthermore, there's still a question of whether Amazon can continue growing its ad spend like it has. As mentioned, ad prices have climbed extremely high for some search keywords on Amazon in the past few months. At some point, the return isn't worth the investment compared to leaving search ad dollars with Google. Amazon is working on developing new ad products for brand advertisers in order to mitigate that challenge.
The growth in Amazon's ad spending is taking some sales away from Google, but the top of the sales funnel for Google advertising is still packed full of marketers looking to spend, growing overall digital-advertising budgets.
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