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Amazon's pitch for the behavioural ad business

The latest financials say it all. Amazon reported last week that its quarterly revenues grew by a healthy 22 per cent or so - down from 36 per cent growth last year - but still worth $16.07 billion. Gross profit margin on that number increased a couple of percentage points to 26.6 per cent. Then, on the journey to the bottom line, most of that dropped away leaving net income down by 37 per cent and a grand total of just $82 million still in the bank. That's net profits of half a per cent!

Most of that big top line number is accounted for by the 'traditional' Amazon business. Which is buying stuff at wholesale prices, selling it online and distributing it. Anyone can (and must) do that, so that's a grindingly competitive business to be in now (thanks mostly to Amazon itself).

It's the other bits of the Amazon pie that are making fatter profits. Web services (web-scale cloud) is doing well of course. As is Amazon Marketplace. This is the arm that hosts other merchants on the Amazon site and through which - surprise, surprise - you and I are doing an increasing proportion of our Amazon business.

Long story short, Amazon makes a better business (on a profitability basis) letting others sell goods on its site than it does in selling goods itself. So that's one very good reason to host your competitors. The other, even better reason, is that Amazon gets visibility of their sales and their customers. And with that data, Amazon is building a tremendous, profitable, behavioural advertising platform.

Yes, it seems counter-intuitive, as did Amazon Marketplace when first launched. Why would you host your competitors? Then, why-oh-why would you give them valuable data about your customers so they can sell them the goods you might have been able to sell them had you kept the data to yourself?

Answer. Because you will make more actual profit, percentage-wise, from the ad sale than you would from the boring business of 'trying' to sell the goods being advertised.

Clearly. the behavioural advertising push is the real value add here and Amazon's results tell the story.

It launched Amazon Advertising, under the radar more or less, in 2010. As it started to take off it got a name and this year it has grown its profits 59 per cent to $798 million in the last quarter.

As a result Amazon Advertising is beginning to occupy the space - ad targeting - that Google currently owns and that Facebook is desperate to enter. There is a long, long way to go for Amazon here, but remember that the ad business offers about four times the margin of the traditional "selling things" business.

Back to creepy. While I appreciate the business model cunning involved in this Amazon evolution, and while I'll continue to buy from the site, I'm uneasy about behavioural advertising. I simply don't want to live in a world where large corporations know more about my spending and mis-spending habits than I do and, if given a reasonable choice, I would probably opt to have my data go to a safe home, rather than to corporations trying to sell me things.

And, it seems to me, advertising is a valuable window on the world - a facet in this debate that is under-appreciated. All our worlds will necessarily narrow if all advertising is targetted and we won't even have peripheral vision of goods and services which fall outside our specific demographic. That would be a huge loss. What do you think?

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