Amazon – Mad Man.

AI is the weakness in Amazon’s push to take on Google and Facebook.

• Amazon has made a habit of unsettling entire industries simply by announcing its entrance but when it comes to digital advertising, its limited AI ability will keep it in Google’s shadow for now.
• However, the same cannot be said for Facebook which I think really struggles with its AI meaning that its ads are less targeted and less valuable
• This means that ad dollars being spent on Facebook could be a softer target for Amazon than Google.
• This is not a new phenomenon as Amazon’s adverting business already has a run rate or around $8bn per year ($2bn in Q1 18 (see here)) but I think its business to date is pretty straight forward stuff.
• Users go to Google to browse but when they go to Amazon, they have already displayed intent and hence, there is a high probability that a search on Amazon will result in a purchase.
• Consequently, the advertising offered by Amazon on its site is going to be much more valuable than anything that Google or Facebook can sell.
• As a result, Amazon’s share of advertising volume is likely to be even smaller than the 1/6^th that it is of Facebook and 1/15^th that it is of Google when it comes to advertising revenues.
• Amazon has made a good start but to really move forward it will need to make its targeting much more effective.
• There are many users who have been on the receiving end of Amazon advertisements for products that they have already purchased.
• If Amazon’s advertising system is not even able to get this bit right, I expect that it will be a long time before it can really understand user behaviour and make its advertising that much more effective.
• This comes down the quality of the AI algorithms that it uses to understand its users and work out what products and services they are more likely to respond to.
• When it comes to this, Amazon is way behind Google but ahead of Facebook meaning that advertisers currently using Facebook might be lured away more easily.
• That being said, Amazon has been losing some sellers to Instagram (see here) where product discovery is easier given the lower volume of sellers and where the costs and conditions of selling are not nearly as onerous.
• Hence, for the simple stuff on its own website, Amazon’s advertising revenues should continue to grow nicely.
• However, to make an impact on Facebook or Google, Amazon will need to understand its users better beyond just shopping, and here I think it still has a lot of work to do.
• Consequently, it is going to be much more difficult for Amazon to disrupt the digital advertising duopoly than bricks and mortar retail but it may make some waves on the way.
• With the current furore around privacy and data, Google is best positioned of all the advertising players as it has managed to escape with no meaningful hacks, leaks or bad PR.
• However, of all the digital ecosystems, privacy advocate Apple is the best place to hide for those wanting to reduce exposure to advertising driven digital ecosystems.

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