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Amazon’s advertising business is showing no signs of letting up.

Amazon reports record profits of $3B, crushes Wall Street expectations for holiday quarter

Amazon on Thursday reported record profits of $3 billion on revenue of $72.4 billion for the fourth quarter.

Fueling its bottom line is Amazon’s growing advertising arm that generates revenue by charging companies to promote their products on Amazon properties.

Amazon posted quarterly revenue of $3.4 billion for its “Other” category, which “primarily includes sales of advertising services, as well as sales related to our other service offerings,” according to financial statements. Amazon does not break out specific financials for advertising.

For 2018, Amazon reported $10.1 billion for the “Other” category. It reported $2 billion in revenue for the category in Q1; $2.2 billion in Q2; $2.5 billion in Q3; and $3.4 billion for the most recent quarter, which was up 95 percent year-over-year.

For comparison, Amazon’s online store sales grew 14 percent and Amazon Web Services sales grew 46 percent year-over-year for the fourth quarter.

On a call with reporters Thursday, Amazon CFO Brian Olsavsky called it a “strong” quarter for advertising, which is quickly becoming one of Amazon’s most lucrative businesses, in addition to its e-commerce engine and cloud computing.

(GeekWire Photo / Kevin Lisota)

Advertising drives a majority of revenue for fellow tech giants including Google and Facebook, which charge advertisers to have their marketing content appear on search results or news feeds.

Amazon employs a similar strategy, but instead with its online marketplace and other platforms, giving vendors, authors, and others a way to reach potential customers. One of its main competitive advantages is the data it has on purchasing habits.

“Ad solutions to help you find, attract, and engage millions of Amazon customers at every stage of their journey,” Amazon’s advertising homepage reads.

eMarketer, which pegs the U.S. digital ad market at $111 billion, forecasted that Amazon would surpass Microsoft in U.S. advertising revenues in 2018, moving into third place behind Google and Facebook.

“Its strong handle on consumer purchase behavior sets it apart from Google and Facebook in the digital ad market, which has made the company an attractive option for advertisers,” said Monica Peart, senior director of forecasting for eMarketer a commentary that accompanied the September report.

One driver of the growth for Amazon in 2018 was due to an accounting change, which added $1 billion to the fourth quarter number. But still — advertising is clearly generating billions annually in revenue for Amazon, with more on the way. Amazon is expected to reach $38 billion in advertising sales by 2023, according to Pivotal Research.

Perhaps more importantly, advertising is a high-margin business, helping Amazon grow its profit — a metric investors watch closely.

On a call with analysts Thursday, Amazon said in recent months it has expanded sponsored brand placements, rolled out new campaign reports, and continues to build features that make it easier for companies to use its advertising services.

Given the company’s activity in various industries, Amazon’s ad business goes further than just e-commerce, extending into movies, TV, gaming, voice products, live sports, and even cardboard boxes — Verizon is placing ads on Amazon packages, The New York Times reported. Grocery purchasing data from its acquisition of Whole Foods can give Amazon more insight into brick-and-mortar advertising strategies. Amazon also allows sellers to buy ads for products not offered on Amazon.

Many startups have emerged around helping marketers navigate Amazon’s advertising platform, including several in the Seattle region: InsightLeap, Downstream, Gradient, and Stackline.

Amazon’s growing advertising business is another example of its battle with Alphabet-owned Google. The companies compete across a number of areas such as voice technology, cloud computing, and online shopping. Amazon has become a formidable e-commerce search engine, competing with Google to be the first place where shoppers start when they want to buy products online.

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