Why Amazon.com is a credible threat to Google
Filed under: Investing
Just when you think you're safe, that's when the competition swoops in and proves otherwise. This could be the fate awaiting Google (NAS: GOOG). An alarming 97% of the search giant's $37.9 billion in revenue last year came from advertising. Google relies on healthy ad sales to stay in business -- a livelihood that Amazon.com (NAS:AMZN) could threaten.
Taking the lead
As the undisputed e-commerce champ, Amazon makes money not only through sales on its website, but also by selling advertising space on its site. Next time you're on Amazon.com, check out the links on a product page listing. The advertisements you see are based on the product you searched for, similar to Google's ads. Customer relevance is critical to maximizing clicks on ads.
Last year, some of Google's top advertisers included Progressive (NYS: PGR) and eBay. Progressive spent an estimated $43.1 million on Google AdWords for the year, while online auction site eBay dished out $42.8 million. By industry the top spot goes to finance and insurance, then retailers, followed by travel and tourism. Priceline.com (NAS: PCLN) was one of the big spenders for the travel sector, spending $19.6 million last year for advertising with Google.
With Google generating billions from its AdWords program and targeted search ads, there's no need to argue the effectiveness of online advertising.
U.S. spending on online advertising is expected to reach $50 billion in 2015, according to eMarketer -- that's a market opportunity that Amazon doesn't plan to miss. In an effort to boost its ad sales, Amazon's actively growing the company's advertising management team. Amazon currently lists 24 open positions within its advertising department.
Amazon, whose site gets around 100 million visitors each month, could be trouble for Google as more shoppers choose to make their initial search on Amazon.com.
For companies such as Procter & Gamble (NYS: PG) and Microsoft (NAS: MSFT), highly targeted placement on Amazon.com means their ads reach tens of millions of Amazon shoppers. More importantly, Amazon makes money when a sponsored link is clicked, and according to some sources, those clicks could add up to more than $1 billion in annual ad revenue. As more consumers use Amazon to directly search for products, more merchants will move their advertising dollars there as well -- leaving Google to fend for itself.