Amazon Prepares Online Advertising Program

This is potentially a real risk to Google. The odds of such a huge success it decreases Google’s profits are tiny (I think). But there is a real risk that the increase in Google’s profits going forward are materially affected by a well done competitor to Adsense.

Adwords is Google’s platform for buying ads. Those ads are then displayed on Google’s websites and on millions of other websites. Other websites can host ads via the Adsense program. It seems to me what is really at risk is better seen as Adsense business. The business on Google’s own websites is not at risk (Google’s profit from its sites are double I think all the other sites [via Adsense] combined).

If Amazon took away 10% of what Google’s Adsense business 4 years would have been that is likely material to Google’s earning. Not huge but real.

Even losing the ads on Amazon’s web site is likely noticeable (though not a huge deal, for Google, for many companies it would be significant, I would guess).

There is even the potential Google has to reduce their profitability, on Adsense, to compete – giving web sites a better cut of revenue.

Google paid out $9 billion to Adsense sites in 2013. That means they kept over $14 I think (I am just going from memory about what the split of revenue Google provides is). Google has expenses some marginal expenses for this revenue but the profit margin is enormous (the fixed costs are significant but the marginal costs are really small and Google is very profitable on this business).

That said, I think Amazon has plenty of challenges to making it an effective competitor to Google. But they have a chance. And there is even a small chance (very small I think) that Amazon could create a competitor that actually results in noticeably (say over 15%) declining revenue to Google via Adsense. Likely even in this case Google continues to grow profit.

Google revenue from ads from their own websites are the most important earnings and likely to continue to be so. Also new business (non web-ad-income) is growing and I think will continue to do so (this is likely an area some might find more questionable).

Another question is if Amazon will actually try to make such a system as profitable as it could be. It will likely take a fair amount of energy and cash to get the program to be successful. Will Jeff Bezos then use the profits to make Amazon profitable? Or will he keep fairly small profit margins and go for growth?

I admire Bezos’ willingness to invest for the long term. But I think he has gone too far and should aim for more near term profitability. I do believe this is a bit less of a concern than many make of it as the cash flow from operations is actually significantly positive. It isn’t as though the business is not profitable. He is just investing tons in growth (and new ventures), which I support.

I wish he would seek to increase the profit margins a bit though and use that to be profitable. I think this would offer the chance for a huge amount of profit that could be a path to such results. However, it will not be easy and the likelihood of pulling that off is fairly small. I think it is a good gamble for Amazon to take though.

Related: Is Google Overpriced? (my answer in 2007? No) – Click Fraud = Friction for Google – Is Amazon Using a Costco Strategy? – Buy Google – The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects

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