Dive Brief:
- Amazon's advertising revenue grew 64% to $7.95 billion in the fourth quarter from a year earlier, a total that surpassed subscription services, which includes Amazon Prime, for the first time and grew at a higher rate than any other segment, per its quarterly earnings report.
- The company also announced that founder and CEO Jeff Bezos will transition to the role of executive chair in the third quarter of 2021. Andy Jassy, currently the chief of the company's AWS cloud services unit, will become CEO at that time.
- The company reported $125.5 billion in total revenue in the quarter, up 44% year-over-year, for a record quarter boosted by e-commerce during the holiday season disrupted by the coronavirus pandemic. As Amazon's ad sales growth rate exceeds that of the company's other segments, its importance as an advertising channel will continue to increase.
Dive Insight:
Perhaps lost amid the news that Jeff Bezos will transition out of the CEO role of the company he founded in 1994 is the increasing importance of advertising revenue to Amazon. While ad revenue was already scaling up at Amazon over the past few years, more recently the growth rate has accelerated past the company's other divisions. Ad revenue's growth rate of 64% outpaced growth for third-party seller services (54%), subscription services (34%), AWS (28%) and even its flagship online store (43%), which again reported record revenue as consumers flocked to the site during a holiday shopping season disrupted by the pandemic.
As e-commerce grows, marketers are increasingly turning to Amazon to reach shoppers as they learn about products and prepare to make purchases. Amazon advertising has a 20% higher return on investment (ROI) compared to a brand's average marketing ROI, per an ROI Genome report by Analytic Partners. Ads on Amazon also drive sales through non-Amazon channels, increasing the importance of the platform for brands and other retailers.
The recent success of Amazon's ad business suggests there may be more room for growth. To make the platform a more appealing destination for advertisers, the company is using a deep learning model to show more relevant sponsored products and improve the relevancy of ads shown on the product detail pages, and has seen "rapid adoption" of video creative format for sponsored brands, Amazon CFO Brian Olsavsky said on an earnings call. These developments can help Amazon keep pace with other advertising platforms and retailers that are bolstering their own ad networks, like Walmart.
Along with Bezos' exit and record revenue driven by holiday spending, Prime Day and international growth, Amazon's ad business might be the company's most important story of the quarter, according to Andrew Lipsman, eMarketer principal analyst at Insider Intelligence.
"Two consecutive quarters of huge bottom-line beats in the face of rising operational costs and softening AWS growth points to a much more profitable ads business than previously appreciated. With plenty off runway for that business to keep scaling over the next several quarters signals major margin expansion ahead," Lipsman said in emailed comments to Marketing Dive.
