Amazon's new advertising system will function much like Google AdWords. When site visitors click on ads, they'll be taken back to storefronts and inventory housed on the Amazon website. The service will use data collected from each visitor's browsing and purchasing habits to customize the ads that are displayed, which theoretically increases the relevance of the ads compared to advertising methods used by Facebook and Google. Relevant ads would be more useful for visitors and more profitable for Amazon.
Additionally, Amazon is creating a tool to help advertising agencies buy in bulk for hundreds or even thousands of advertisers. This system would allow Amazon to increase its business placing ads on third-party websites.
Amazon is expected to test this platform later this year, gradually replacing the ads on its site that are currently supplied by Google. For Google, this comes as a low blow. As the United States' largest online retailer, Amazon is believed to be one of the largest purchasers of Google AdWords. AdWords is estimated to bring in about $1 billion in revenue for Amazon. If Amazon owned this revenue stream outright, it would present a much greater opportunity for the company to become profitable. Amazon currently operates on razor-thin profit margins and has posted significant losses in recent years as it attempts to expand.
Several industry insiders have stated that they're supportive of Amazon's attempt to take on Google since it could potentially have broad implications for the future of retailing both online and offline. Jason Goldberg, vice president of commerce strategy at Razorfish, said:
Per a recent L2 study, 30 percent of online shoppers start their search on Amazon vs. 13 percent on Google. That's a huge amount of traffic that Google isn't getting in one of the most profitable advertising segments. Now imagine what happens if Amazon extends its reach from the seven percent who buy online, to all the physical retailers that could use Amazon as a payment gateway with its new credit card reader service [Amazon Local Register]. It's a scary scenario for Google. It's going to be interesting to see how they respond.Google AdWords launched in 2000. It currently has more than one million advertisers competing for ad space—which pushes prices up and provides a big incentive for publishers to use the system. Google has declined to comment publicly on Amazon Sponsored Links, but says it paid more than $9 billion to outside publisher websites in 2013.
[Photo courtesy of Vernon Chan via Flickr.]