The attention-getting business in the U.S. is enormous. Everyone with a product, service, or even an idea to sell has to put it in front of potential customers. Last year, they spent $212 billion on that task, and an ever-growing share of that spending is going online. Specifically, a lot more of them are advertising on Amazon.com (NASDAQ: AMZN), which last year doubled its ad revenue to about $6 billion, making it the third largest player in the entire industry, behind Google and Facebook.
In this segment of the Motley Fool Money podcast, host Chris Hill and Fool senior analysts Andy Cross and Jason Moser discuss the reasons that the e-commerce and cloud-computing giant has accelerated into the top tier of ad platforms, what it means for the company and its rivals, and more. They also reflect on Amazon's latest move to trim some prices at Whole Foods.
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This video was recorded on April 5, 2019.
Chris Hill: We begin this week with Amazon. Not Amazon the retailer, not Amazon Web Services, but Amazon advertising. Wall Street Journal reporting this week that the ad spend in the U.S. hit $212 billion last year. That's up nearly 10% from the year before. But within that story about U.S. advertising writ large came the news that Amazon more than doubled its ad revenue to roughly $6 billion. Andy, I know I shouldn't be surprised by that. And yet, I still am.
Andy Cross: There's been a lot of great conversation recently and articles written about the exploding growth of Amazon's ad business. They are now by some estimates the third largest advertising player in the market behind Facebook and Google, upwards of north of $10 billion to $11 billion. It's a significant player now in this space as more and more of our ad searches and our product searches move from Google over to Amazon. By the estimate of this article you mentioned, WPP, which is the largest ad buyer in the country, spent $300 million directly on Amazon ad searches last year, two to three times as much as a year ago, and 75% of that came from budgets that were originally allocated to Google Ad searches. Google is still the dominant player. They have the largest market share when it comes to ad searches. But clearly consumers now are searching more directly on Amazon than what we used to do.
Jason Moser: I think we're going to start to see the strengths of Amazon's business model. I guess we've really already seen the strength of it, but we're going to see more so how the advertising component benefits and complements their business model. They've always been on that commerce side. It's natural to go ahead and bring that search behavior over to the Amazon platform. When you think about Google, you're doing the search for whatever, and it's taking you ultimately to another place to buy something. So it's a little bit less of a dynamic relationship there. With Amazon, you're bringing that search and advertising component already over to a very powerful e-commerce engine. It's not going to be as meaningful as Google's ad business is to it. But it will be nice, incremental revenue and high-margin revenue at that, that really helps feed their bottom line profitability for a lot of years to come.
Cross: By one study now, 54% of our product searches now start directly on Amazon, as opposed to where it was a few years ago at 46%.
Moser: I would say personally, I do that more.
Cross: Me, too!
Moser: It's just a quicker way to get to what I'm trying to find.
Cross: Now, Google is still the largest player in this space. It's not like they're a threat from Amazon particularly with this, but maybe on the margins, more and more ad clients start moving their dollars more toward Amazon.
Hill: I feel like we've seen this movie before with Amazon in this sense -- for the longest time, the focus was on the e-commerce site, and rightfully so. All of a sudden, you started to hear about this Amazon Web Services business. And by the time that story really got to be mainstream for mom-and-pop investors, the thing was a behemoth. I feel like this is what we're seeing now with the advertising business.
Cross: The digital ad space is still growing very rapidly, almost 20% a year, and it's still a relatively small part of the overall ad budget for clients globally as they spend dollars on advertising. So I think you're right, Chris. You look out five years, and the Amazon advertising story is not going away. We will hear more and more about it.
Hill: Real quick, Jason, one other story this week regarding Amazon cutting prices at Whole Foods. As a shareholder, should I be happy about this? As a consumer, I am happy about this.
Moser: It's certainly not surprising. I think a lot of us expected it to happen. Whole Foods' biggest challenge when Amazon bought it was figuring out a way to rid itself of that reputation for being very high-priced, that Whole Paychecks nickname which we've seen thrown around so often. They're really trying to figure out how to get rid of that. When you look at grocery, the key to grocery, it's such a low-margin game to begin with, the key is traffic. What's the easiest lever to pull for traffic? Lower prices. So, I don't think this is the last time they'll do that, but it's one more way they can help try to gen up traffic. Ultimately with Amazon, it's about that Prime relationship and figuring out ways to offer more and more value for that Prime relationship. This is another one. Remember, too, it's not just going to be Whole Foods. They're going to be opening up Amazon grocery stores as well that will be focusing on a lower price point. I think this is just the very early days of what is going to be very big presence for Amazon in the grocery space.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Facebook. Chris Hill owns shares of Amazon. Jason Moser owns shares of Alphabet (C shares) and Amazon. The Motley Fool owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. The Motley Fool has a disclosure policy.