Amazon's media service revenue hit $945m in Q2
Revenues for Amazon A9 and Amazon Advertising Platform hit $945m during Q2 2017, compared to $626m the previous year, according to an earnings call. The retail giant also posted sales revenue figures of $38bn, a 25% annual increase, and a 42% rise in headcount since 2016. Despite this, shares in Amazon fell as the figures revealed the firm fell short of analyst expectations. Amazon has been on a push to extend its advertising capability, with the expanded workforce mostly directed at the emerging media services offering.

Amazon's hopes of building an online advertising business to rival that of Facebook and Google is at the core of its recruitment drive at present. The company’s finance chief told investors that its 42% year-on-year increase in headcount was driven primarily by it acquiring software engineering talent and building teams to promote its emerging media services offering.

Additionally, Amazon is also pre-empting the closure of its proposed $13bn purchase of Whole Foods by experimenting with a number of e-commerce solutions as well as bricks and mortar outlets, as well as staffing up to bolster its emergent advertising business, according to leadership.

Amazon's Q2 earnings

The e-commerce giant yesterday (July 27) posted a 25% annual increase in sales revenue which hit $38bn during the three months to June 30, although a spike in the company’s operating costs saw its level of profitability plunge.

Despite the impressive increase in revenue, Amazon’s stock prices actually fell in the early hours after trading due to the company missing analyst expectations – incidentally this decrease in stock price meant that Amazon chief Jeff Bezos was ‘the richest man in the world’ for only a matter of hours.

While retail sales make up the vast bulk of Amazon’s revenues are generated via retail sales (both e-commerce and increasingly in its bricks and mortar stores) the company did breakout its earnings by sub category.

Chief financial officer Brian Olsavsky run-rate of its online cloud computing service Amazon Web Services (AWS) was $16bn during the second quarter, compared to $14bn in the previous one, with the increase in revenue representing the largest sequential increase in its earnings since its launch in 2006.

Nascent media business

Meanwhile, the company’s emerging media services business (which includes Amazon A9, plus Amazon Advertising Platform, or AAP, etc) are categorized as a “other”, with revenues in this category hitting $945m during the quarter, compared to $626m 12 months earlier, according to the filing.

Answering questions on its operating expenses Amazon’s Olsavsky pointed out that a notable cause of its cost increase was a significant increase in the company’s headcount, as well as its B2B marketing efforts.

The growth rate of its headcount (now north of 382,000) was 42% year-over-year, and while this has historically been driven by hires in its operations staff, but as it continues to diversify its revenue streams, this is changing, according to Olsavsky.

“Right now what we’re seeing is an accelerated growth rate in software engineers and also sales teams to support, primarily in the US and advertising, the growth rate of those two categories exceeded the company growth rate of the company,” he told analysts.

“So we are having success at hiring a lot of people and pointing them at some very important programs,” Olsavsky added, while also pointing out that marketing spend to promote AWS and its advertising offerings had “probably larger than normal impacts on Q2 operating margin.”

During the call with finance analysts, Olsavsky pointed out that while its proposed Whole Foods purchase was not included in this guidance, it is preparing for this eventuality.

“On the place of Amazon Fresh – and we include Prime Now and some of our other efforts – we believe there will be no one solution, so we’re experimenting with a number of formats from physical pickup points with Amazon Go, to online ordering and delivery to your door through Prime Now and Amazon Fresh,” he said.

“We’ll see how customers respond, we’ll see how customers respond we’ve liked the response so far,” he said. “Amazon Go is not out of beta, but the other ones are. On top of that we’re looking forward to adding the Whole Foods team and their great reputation for quality customer service to this offering.”

Amazon's ad business to generate $1bn in 2017

Industry observers have noted with interest how Amazon has spent the last 18 months stepping up the promotion of its advertising services, with eMarketer forecasting that Amazon’s advertising offering, which offers brands the ability to promote their wares on its own website plus third parties based on vast swathe of first party data are poised to generate $1bn in revenue in 2017.

This increase has prompted WPP chief Sir Martin Sorrell to label Amazon as “the sleeping giant” of online media, with a 2017 study of advertisers and agencies revealing that its demand-side platform (which lets advertisers bid on ad inventory based on Amazon data) surpassing Google’s offering DoubleClick as the most used DSP on the market.

That’s according to research firm Advertiser Perceptions, which surveyed 800 media buyers to gauge their reaction to the offering, with the results indicating that the buy-side of the industry was eager for the option of an alternative to DoubleClick's DBM.

Addressing analysts on the call, Olsavsky explained that although its online advertising tools were self-service platforms (ie where the media buyers users software of ‘a dashboard’ to automate their media buyers) Amazon still wanted staff to explain the tools.

“So, we built self-service tools and obviously we want to make those as efficient as possible for customers and advertisers, but we realize that we will need actual sales contact with the accounts as well. So it's a mix. I can't get into the split, really, but I would see both growing,” he concluded.

SaveSave