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Can Amazon save itself from its ads?

I’ve been absolutely fascinated by this recent article about Amazon. Written by Zack Kanter who really does know his way around the retail landscape, it expertly dissects Amazon’s rise to global retail dominance, following that of its predecessor goliath, Walmart.

History can be viewed as many things, one of which is a succession of that which seemed unassailable, right up to the point that it wan’t. A change which in retrospect was unbelievably obvious.

Kanter doesn’t claim to be making predictions about what might ultimately knock Amazon off its perch, or at least give it a big shock. He is a massive fan of Amazon and very bullish about its future. But he does very astutely identify something that could be the cause of much trouble brewing. Our old friend, digital advertising.

For the first time Amazon’s advertising strategy opens up the possibility of a real and meaningful challenge to its competitive defences.

Amazon’s massive growth in advertising revenues is currently rightly attracting lots of attention across the board. This is both for its rapidly growing contribution to Amazon’s bottom line as well as what it could mean for other digital platforms who rely on advertising. They now have to add the Seattle giant to Google and Facebook on their list of most existential competitors.

Walmart was able to dominate retailing because it created and refined systems to outperform every other competitor in that physical world. Better inventory management, better logistics, fiercer supplier negotiations and so on. It understood its world so completely that was able to find every opportunity to gain advantage and it exploited them ruthlessly.

This mastery of the physical world however was of no use in digital. Enter Amazon who have taken the same approach but applied it to online retailing. One of the key examples of this was the launch of Amazon marketplace. While Amazon was never restrained by physical shelf space, it still took time to identify, negotiate with and bring stock into its warehouses from all potential new suppliers.

By throwing open its platform as Amazon Marketplace, at a stroke Amazon eliminated this. Every supplier in the world could now access Amazon’s platform and enormous customer base in no time at all and with minimal effort needed from Amazon (but a nice cut of the sale). Amazon’s product range increased enormously, of great benefit to its customers. A masterful step by Amazon and not the first or last example of extending its lead by taking a platform approach to anything and everything. (Amazon Web Services also emerged out of this concept for example).

This introduced a new problem familiar to all digital services however - when you have infinite shelf space, how do people actually find what they want and not get overwhelmed by these endless options. Some platforms like Spotify and Netflix are going large on machine learning and algorithms, Apple have always made a strong argument for their human editors (in reality of course all platforms use a blend of both, human and machine).

Amazon’s approach was advertising, which it named ‘Sponsored Products’. There’s nothing remotely new about retailers taking payment or some other benefit from suppliers for improved visibility with their customers but in the physical world the retailer still maintains total control over all the products within its store.

In Amazon’s case, because of the pre-existence (and great success) of Amazon Marketplace, Amazon may have very little or no overview of the supplier. It can and does take swift action whenever evidence of bad behaviour comes to light, but the sheer size of Amazon Marketplace and number of vendors within it makes that a herculean task.

The result of all this is that the Sponsored Products system benefits those players who can most effectively work and game the system, which has no correlation with whether the products they are selling are the best for consumers. As Kanter puts it:

“The problem with Sponsored Products is that sponsored listings are not actually good for customers – they are good for sellers; more specifically, they are good for sellers who are good at advertising, and bad for everyone else.”

Meanwhile the revenue from this advertising is rocketing, nearly $10bn already, becoming highly meaningful for Amazon and seen as a major source of future growth.

Amazon has pushed and pushed to ensure it always has more products available than anyone else - the most infinite of infinite shelves. That created a huge issue of navigating this bottomless pit of merchandise. However this ad-led solution to solve the problem has created a distortion in the marketplace that will be very hard to remove.

Previously what was good for Amazon was always good for its customers and vice versa. Sponsored Products look like the first time this link has been broken.

Is the curse of digital advertising striking again?

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