Pivotal Equity Research analyst Brian Wieser provides an outlook on Amazon.com, Inc. (NASDAQ:AMZN)’s video advertisement sales.
Amazon selling video ads
Amazon.com, Inc. (NASDAQ:AMZN) is now selling video ads on its own site. The scale of their effort is unclear, but at minimum Amazon’s efforts in this regard will undoubtedly help the company – likely already approaching $1bn in online ad revenue – continue to grow in importance to the online advertising economy.
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Amazon.com, Inc. (NASDAQ:AMZN) has quietly become one of the biggest sellers of online advertising, perhaps earning more than $1bn in revenue this year (eMarketer estimated last year that Amazon would capture more than $800mm in 2013, and sustained growth would likely push the company over the billion dollar mark), but most of these sales have been display-oriented to date. While in-stream video ads off of Amazon sites have been offered since at least some time last year, news emerged yesterday that the company is selling video on its own site in association with product queries. Towards this end, ad tech company Freewheel has announced that it is working with Amazon.com to facilitate their sales of video advertising. Interestingly, ads we saw in a brief test of our own were both from The Procter & Gamble Company (NYSE:PG).
It is not presently clear at this time how broadly Amazon.com, Inc. (NASDAQ:AMZN)’s effort will be pursued in terms of supply (as in, will video viewed through Amazon Prime or on Kindles now become ad supported and how aggressively?) or demand (as in, how aggressively will Amazon sell this inventory and how competitive its pricing will be). We believe the initiative is in early days, so presumably if the specific offering works for early advertisers, their agencies, Amazon and its consumers, a big question for investors will be the competitive impact on a range of other companies.
Amazon’s presence to be neutral for other sellers
On balance, Amazon.com, Inc. (NASDAQ:AMZN)’s presence in this area will probably be neutral on other sellers of online video inventory. In general, we consistently hear from large brands that they want more online video inventory as part of their existing spending efforts, and towards this end, we think that most of the growth of online video to date has occurred because of shifts of budgets from conventional display and rich media towards video assets. Context matters for many advertisers who spend money on online video, and targeting data that is un-related to e-commerce can still be valuable. In general, to the extent that Amazon produces more inventory than a given competing publisher it has potential to gain market share. However, if Amazon chooses to become particularly aggressive, the data it can use to target is probably only matched by a handful of other media owners (such as Google and Facebook) and further share gains could follow. In this regard, Amazon could exercise a significant advantage over most of its competitors.
The more interesting read-through relates to the potential of Amazon.com, Inc. (NASDAQ:AMZN) including pre-roll video in its original TV properties. We heard from Netflix during its most recent earnings call that it was unlikely to offer advertising alongside its original quality programming, but Amazon could always take a different approach. To the extent that Amazon is willing to do so, and further presuming that it allows Nielsen’s OCR (Online Campaign Ratings) tags, we think Amazon would be positioned to capture traditional TV budgets (if small in absolute amounts initially) in the future.
Risks for Amazon
Three core risks for all web publishers relate to: 1) high degree of rivalry given an absence of barriers preventing new competition from emerging 2) overly high and increasing capital needs to remain and 3) government regulations and consumer pushback related to management of consumer data and respect for privacy.