Amazon's Next Move To Boost Its Advertising Business

Amazon's (NASDAQ:AMZN) advertising business had a stellar 2018, more than doubling year over year to reach about $10 billion. Analysts don't expect much of a slowdown in 2019, with expectations of greater than 50% growth (i.e., the same amount on an absolute basis).

But some analysts have already raised concerns that the online retail giant is reaching the point where increasing the number of ad units it shows could negatively impact the shopper experience. Amazon's solution is to focus on delivering greater value to advertisers. Its latest product to do so is a mobile video ad unit within its app. The company is currently testing the product in its iOS app with plans to expand to Android this year, according to Bloomberg.

These mobile video ads could be pivotal to the continued growth of Amazon's advertising business.

Amazon's advertising challenge

Amazon was able to quickly grow its ad business to $10 billion in revenue thanks to the massive amount of traffic its website generates. Amazon garners nearly half of all internet product searches. It also has built-in base of advertisers, as it serves millions of third-party merchants and vendors all selling their products on its marketplace. Amazon easily filled its sudden surge in ad inventory.

But Amazon can't just keep adding more ads to every product search results page. The challenge is even bigger on mobile, where screen real estate is limited.

That's further emphasized as more shoppers browse and search Amazon through its mobile app. From 2013 to 2015, Amazon saw the percentage of shoppers using its mobile app climb from about 50% to over 70% during the holiday season. That number has likely only gotten bigger as Amazon has promoted its mobile app in recent years. (Amazon has stopped reporting the metric.) As more shoppers spend more time on mobile versus Amazon's desktop site, it reduces its overall ad inventory.

About 35% of Amazon's U.S. ad revenue came from mobile in 2018, according to estimates from eMarketer. Growing its mobile advertising products to match the amount of time spent on its mobile app and website will be key to driving growth in the business going forward.

The big opportunity with video ads

Mobile video advertising is one of the fastest-growing segments of digital advertising. Spending on mobile video ads in the U.S. is expected to grow at a rate above 20% in each of the next two years.

Video ads on Amazon have the potential to create much more value for advertisers than pre-roll video ads on YouTube or other social media. The ease of buying on Amazon's platform makes ads more likely to convert into a sale than a similar ad on another platform. As a result, Amazon ought to see relatively high ad prices for its video ad product. That means it can continue to grow ad revenue without increasing its ad load.

Introducing video ads in mobile search results also presents an opportunity for Amazon to show more or more targeted video ads in its other video products. The move should increase the number of active video advertisers on Amazon's platform. It can cross-sell those advertisers on its other video ad products like ads in IMDb Freedive, ads on Twitch, or commercials during its live sports events on Amazon Prime Video.

More active advertisers results in more options to show viewers. That, combined with Amazon's shopper data, means more relevant ads and greater conversion rates. Higher conversion rates lead to higher average ad prices for Amazon and ad revenue growth.

Video ads in mobile search results have the potential to increase Amazon's average ad price for its core search results ads. On top of that, they could also boost ad revenue across other video ad products, such as those in its video services. That will enable the company to keep growing ad revenue at a healthy pace without diminishing the shopping experience for customers.

This article originally appeared in The Motley Fool.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.