One of Amazon's most promising new business areas, advertising sales, appears to be slowing down.
The growth of Amazon's "Other" segment, which consists primarily of advertising sales, slowed dramatically to 36% in the first quarter from the previous year, at $2.72 billion. That's a big slowdown from 97% year-over-year growth last quarter, and over 100% growth for three consecutive quarters before that.
However, the rate of growth was artificially boosted in 2018 by an accounting change in January 2018. On an adjusted basis, the year-over-year growth rate in the "Other" segment in Q4 2018 was only 38%, and ranged between 51% and 73% in the previous quarters last year. So, while advertising growth has slowed, the drop-off was not as dramatic as it seemed to be from the company's earnings statement.
Amazon's fast-growing advertising business has been a bright spot for the company amid slowing growth in its core e-commerce business.
According to figures from eMarketer, Amazon has become the number three digital advertiser in the U.S, behind only Alphabet's Google and Facebook. CNBC previously reported that some consumer packaged goods advertisers were moving as much as half of their search ad budget from Google to Amazon, where an advertisement can be converted into an immediate sale on the site.
As of February, Amazon was expected to take over 8.8% of net digital ad revenue share in the U.S. It still trails behind Google, which is expected to have 37.2% share this year, and Facebook, with an expected 22.1%, according to eMarketer.
Analysts during the earnings call asked executives to comment on any supply and demand dynamics at play with the advertising business because of an apparent step down in the advertising business. Amazon's chief financial officer Brian Olsavsky declined to elaborate on ad loads or inventory, but said the company is working to drive relevancy and serving useful ads.
"Most of our focus has been on adding more functionality, adding more products and adding reporting for businesses and advertisers so they can understand the incremental customers we're seeing through advertising with Amazon," he said. He added the company has been making operational improvements like adding tools, making better recommendations, making it easier to use Amazon demand-side platforms. "We're very focused on serving brands as well."
Another asked if these improvements could re-accelerate growth, or if Amazon's ads business is now facing the "law of large numbers."
"I wouldn't comment on acceleration or deceleration of growth, I would just say we're early on in this venture, it's having a lot of pickup by both both vendors, sellers and also authors we feel like If we work on the inputs in this business and continue to grow traffic to the site, we will have a good outcome in the advertising space," Olsavsky said.
Amazon's steady expansion beyond e-commerce has drawn fire from some politicians.
Most prominently, Democratic candidate Sen. Elizabeth Warren in March unveiled a plan to break up Amazon and other tech giants, saying they have "too much power over our economy, our society, and our democracy." In particular, Warren has said Amazon plays a dual role of running a marketplace and selling its own products in it, creating a "conflict of interest." Amazon removed some promotional spots for its own products earlier this year, possibly in response.
The company revealed the numbers as it reported better-than-expected earnings Thursday. The stock barely moved after hours, as revenue was mostly in line with expectations and operating profit guidance for the second quarter was light.
Update: This story and its headline have been changed to reflect the fact that Amazon's advertising growth rates were partly affected by an accounting change in the first quarter of 2018. A previous version of this story used non-adjusted growth percentages in Amazon's "Other" segment, which made it appear that Amazon's advertising revenue growth slowed dramatically between the fourth quarter of 2018 and the first quarter of 2019. However, Amazon changed the way it accounts for certain advertising revenue in January 2018. This made "Other" growth rates look artificially high in 2018 in the company's last earnings report, in turn making the slowdown in Q1 2019 appear more pronounced than it actually was.
