Without much fanfare, Amazon has managed to build a billion-dollar advertising business.

That's not so surprising when one considers that, depending on who you ask, roughly 50% of consumers in the US start a product search on the company's site or in its mobile app, and many more consult Amazon before finalizing a purchasing decision.

Because Amazon plays such a huge role in the shopping lives of consumers, even companies that still move most of their product through other channels, such as L’Oréal, and brands that have tried to avoid Amazon's pull, such as Nike, are increasingly finding that they have little choice but to work with the ecommerce behemoth in some way.

With Amazon capturing so much of the online retail market in the US, it has amassed a treasure trove of customer data that is likely far more rich in information than that held by any other company, including digital ad giant Google. After all, Amazon knows what products its customers have purchased and for customers and non-customers alike, has detailed information about the products they've demonstrated interest in.

Now, Amazon is reportedly preparing to apply this data to its burgeoning ad business in what could present a huge challenge to Google.

As reported by Bloomberg, Amazon is testing a remarketing ad product that will allow its merchants to target shoppers on third-party websites and apps. A Bloomberg review of an invitation Amazon sent to a merchant indicates that the new ad offering "can help merchants target shoppers who have viewed their products or similar ones."

It's not clear what sites and apps Amazon is serving ads to, and Amazon did not respond to a Bloomberg inquiry for more information. Obviously, the success of Amazon's remarketing ad product will depend largely on its ability to forge relationships with publishers and app developers.

retargeting

A stylised idea of retargeting

If it can obtain sizable distribution, it will pose a threat to Google, as well as companies like Criteo. Google and Criteo generate billions of dollars a year from their remarketing offerings and at least some of those dollars could be up for grabs if Amazon's test turns into a full-fledged effort.

Another Amazon tax?

Interestingly, some of the dollars that Google stands to lose are from Amazon itself. As Bloomberg's Spencer Soper and Mark Bergen noted, just recently, Amazon abruptly stopped bidding on Google Shopping ads, which it used to drive traffic from Google to Amazon.

As Chad Rubin, the co-founder of ecommerce management platform Skubana, explained to Bloomberg, it would appear Amazon is effectively going to launch its own remarketing ad product so that it can charge merchants for a service it used to offer for free:

They are going to make this a platform and make money from it instead of doing it for sellers pro bono. It gives sellers more reach, but they have to pay for it instead of giving it to them for free.

In other words, from this perspective, Amazon's remarketing ad product offers Amazon another way to tax the marketplace merchants who drove more than half of Amazon's unit sales in the fourth quarter of 2017.

Right now, all merchants pay Amazon fees for selling. Those that want to take advantage of Amazon's more than 100m Prime subscribers pay Amazon to use its fulfillment service, Amazon FBA. And many merchants pay Amazon to promote their products in Amazon's search results.

If Amazon's remarketing product proves effective, merchants that want to keep up will be pressured to shell out even more money to use it lest they be beat out by competitors who pay for Amazon's remarketing offering.

A wake-up call for merchants

While none of this is to say that merchants are necessarily getting a raw deal – many companies are running successful, profitable operations on Amazon – retail is a very tough business and margins are tight in many product categories. The issue for merchants is that as Amazon's ad business grows more powerful, there's every reason to believe that the company's leverage will grow significantly too and historically, as its leverage has grown, Amazon has sought to capitalize on it.

In other words, Amazon doesn't give anyone free lunches if it doesn't have to.

For this reason, Amazon's latest ad move is a wake-up call for merchants that have put all their eggs in the Amazon basket. The good news is that for all of Amazon's advantages, it still has weaknesses and savvy players can take advantage of them to, at a minimum, diversify their operations.

Patricio Robles

Published 16 May, 2018 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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