Watch Amazon’s advertising business grow

Alphabet‘S (NASDAQ:GOOG) (NASDAQ: GOOGL) Google and Amazon (NASDAQ: AMZN) dominate the online advertising and e-commerce markets in many countries, respectively. There are usually clearly defined barriers between the two companies’ ecosystems: Google has repeatedly tried to enter the e-commerce market, but compared to Amazon it has not made significant progress. Amazon owns a fledgling advertising company but is still overshadowed by Google.

Image source: Getty Images.

However, recent estimates indicate that Amazon’s advertising business is growing at a much faster rate than Google’s and could become a pillar of the company’s growth over the next few years. Therefore, investors should understand what Amazon’s advertising business does and how fast it is actually growing.

Understanding Amazon’s advertising business

Amazon’s advertising business is divided into three units: Amazon Media Group (AMG), Amazon Marketing Services (AMS), and Amazon Advertising Platform (AAP).

AMG is the team that sells Amazon advertising products and works with companies to optimize the display of these ads on Amazon sites – including its namesake marketplace, IMDb.com, DPReview.com and Kindle devices. The A9 AMG advertising network also competes with competitors such as Google for advertising inventory.

Image source: Getty Images.

AMS is a pay-per-click performance marketing suite that offers vendor-sponsored products, headline search ads, and product display ads. The platform also offers “Amazon Stores” that can be customized with brand-specific templates and URLs.

AMS ads only appear on products sold on Amazon and ads only appear on Amazon sites. Unlike Google AdWords, which is determined by an advertiser’s optimization choices, AMS ad ranking is determined by product popularity and overall sales.

AAP is a permission enabled in the AMS package that displays programmatic ads. Advertisers using this service can work with Amazon’s customer service team to plan marketing campaigns or use the self-serve advertising platform the company introduced in 2014.

How big is Amazon’s advertising business?

In mid-January, JP Morgan said Amazon generated $2.8 billion in advertising revenue in fiscal 2017, a figure that could grow as much as 61% to $4.5 billion in 2018. This amount will represent approximately 2% of Amazon’s estimated revenues in 2018.

It’s not a significant percentage, but JP Morgan expects Amazon’s ad revenue to reach $6.6 billion by 2019. JP Morgan believes that growth will be supported by the development of the Amazon Prime ecosystem, the introduction of new digital advertising tools and growing popularity among major advertisers.

By comparison, Wall Street expects Alphabet, which generates nearly 90% of its revenue from Google’s advertising business, to increase its annual revenue by 22% to $110 billion in fiscal 2017 when it reports fourth-quarter and full-year earnings on Feb. 1.

Amazon’s advertising business isn’t yet in the same league as Google, but many advertisers have taken notice. Advertising giant WPP (NYSE: WPP), which spent about $5 billion on Google ads last year, plans to increase its ad spending on Amazon from about $200 million in 2017 to about $300 million this year. In an interview with CNBC, WPP CEO Martin Sorrell said the decision was due to the fact that “55% of product searches in the U.S. come from Amazon,” not Google.

Will AMS become the next AWS?

Today, Amazon’s biggest profit driver is AWS (Amazon Web Services), the world’s largest cloud infrastructure platform. Like AMS, AWS started as a small side business of Amazon but gradually evolved into a core pillar of the company’s growth.

AMS’s online advertising revenues are also likely to be high-margin, as are AWS’s cloud services. AMS still doesn’t generate enough revenue or operating income to move the needle for Amazon, but its gradual growth could turn it into a third pillar of growth alongside its core marketplace and AWS business.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Leo Sun owns Amazon shares. The Motley Fool owns and recommends shares of Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy.