Your Ad Tech Tax Is Amazon’s Opportunity

The Sell Sider” is a column written for the sell side of the digital media community. 

Today’s column is written by Claude Denton, co-founder and chief technology officer at Nanigans.

When Jeff Bezos famously said, “Your margin is my opportunity,” he was referring to retailers’ historically high margins and Amazon’s intent to undercut them with lower prices and economies of scale.

Amazon is now exploiting a similar opportunity with digital advertising.

Amazon’s advertising business is now worth $2 billion, which is about 60% growth year over year. Pundits expect Amazon to shake up the Google-Facebook ad duopoly. But what many are overlooking is Amazon’s role as an advertiser, an ad network and a marketplace. To understand why that matters, you must first understand header bidding and the fact that Amazon is now the third most popular header tag among publishers.

Header bidding gives brands access to premium ad inventory that was previously only available via direct deals with publishers. But Amazon benefits even more from header bidding because it’s both an advertiser and an ad network. It doesn’t need to use an exchange to get into the header and thereby doesn’t pay the typical 15% exchange fee. Amazon then saves another 15% by incorporating its own demand-side platform into the process. Plenty of advertisers access headers using their ad tech vendors, but they’re paying a 30% premium that Amazon isn’t paying.

This puts Amazon in an elite position. Imagine being able to bid 30% higher than competitors but still keep your margins. Think of all the additional high-quality users advertisers would be able to reach and the boost in sales volume that would follow. It’s a vicious cycle for anyone trying to compete with Amazon.

Amazon’s unique ‘opportunity’

But that’s just the beginning. Amazon is getting others to foot the bill for much of its ad spend.

In this way, Amazon is vastly different from fellow walled gardens Google and Facebook. Google Display Network and Facebook Audience Network (FAN) ads don’t go back to Google or Facebook for purchase. But Amazon ads go back to Amazon where the company gets a cut of the transaction fee.

This isn’t a new strategy for Amazon. The company has always been able to externalize risk and internalize profit. Take, for example, an independent seller that takes the risk of selling a new product on Amazon that wasn’t widely available before. If the product becomes a hit, then Amazon can create its own version of it and undercut the independent seller. Amazon can apply this strategy to a guy selling toaster strudel or a major retailer selling handbags. No one is too large or too small to get scooped.

As an ad network, Amazon also has data on an advertiser’s audience and on which sites the ads are succeeding. Sure, Google and Facebook have this information too, but they won’t turn around and compete with the advertiser.

Amazon’s knack for controlling so many aspects of advertising and commerce is impressive. Yet, it’s a scary proposition if you’re a retailer trying to compete with Amazon.

What’s a retailer to do?

The hard truth is that Amazon is consistently in headers without paying ad tech supply-chain fees and every other brand isn’t. Any alternative solution has to confront that reality and compete with it.

To some, FAN may seem like one such alternative. While FAN is a good way to expand the reach of successful Facebook campaigns beyond Facebook owned-and-operated properties, it doesn’t offer the transparency, access or efficiency advantages Amazon currently enjoys. Because of that, it isn’t the ideal alternative.

Publishers need an incentive to give other advertisers a chance at leveling the playing field against Amazon. The only way out of Amazon’s enormous shadow is for advertisers to join forces to generate the kind of scale and demand that would entice publishers to open up one of their few header spots. If this happened, we could start to see Amazon’s secret advantage begin to fade, providing a greater opportunity for more retailers to compete.

I can’t say for sure what form a successful alternative would take, but no single advertiser will be able to do it alone. For any solution to stand a chance, it must:

  1. Aggregate at least $1 billion a year in demand to be interesting to publishers.
  2. Eliminate the inefficiencies in the ad tech supply chain because, by being in the header, Amazon doesn’t have those inefficiencies.
  3. Facilitate trust and transparency so that publishers know that this solution is working for them as well as, if not better than, the Amazon solution.

Publisher header spots are scarce and unlikely to increase in number because they slow down websites. To get a coveted spot, advertisers needs to achieve A, B and C. Otherwise their ad tech tax will continue to be Amazon’s opportunity.

Follow Nanigans (@Nanigans) and AdExchanger (@adexchanger) on Twitter.

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