By Alistair Barr
(Reuters) - Amazon.com Inc is known as the world's largest online retailer, but the company is aggressively expanding in online advertising, putting it on course for a clash with Google Inc, the leader in the space.
Amazon Product Ads, which promotes other companies' products on Amazon's website, emerged this holiday as a major online sales channel for some retailers.
Amazon is actively hiring for its Display Ad business. And its Adzinia Media Group advertising unit recently doubled its office space in New York to 60,000 square feet.
Amazon is capitalizing on the more than 100 million monthly visits to its websites by selling ads to other companies that are willing to pay to reach this huge base of potential customers. While the effort risks losing sales to rival retailers, it is also a potentially lucrative business for the company.
"It's higher margin than their traditional business and they've shown a lot of interest in expanding it," said Ben Schachter, an analyst at Macquarie.
Online advertising will grow by more than 20 percent to over $30 billion in the United States this year and may reach $50 billion by 2015, mainly driven by a surge in display ads, according to eMarketer.
Display ad providers generate profit margins of 20 to 25 percent, while Amazon is used to margins of 5 to 6 percent, Schachter noted.
ADS FOR OTHERS
Amazon is running product ads and display ads on its own websites, including Amazon.com, IMDb.com and DPReview.com. But Schachter expects the company to branch out to other websites.
That would put Amazon in direct competition with Google, Yahoo! Inc and Facebook, the top three players in online advertising, according to eMarketer data. ValueClick Inc would also become a rival, Schachter noted.
Amazon has detailed data on customers and could use that to create more relevant and timely display ads on websites, the analyst said.
When someone visits a site, Amazon data may help identify the person as a resident of a particular state who recently bought a specific product, like diapers, from an Amazon website. The display ad that pops up would adjust in real time to promote baby products, Schachter explained.
Schachter began tracking Amazon's display ads for the first time in the fourth quarter, along with Yahoo, AOL Inc, Google's YouTube, and MSN, owned by Microsoft Corp.
Display ads appeared often on the Amazon.com homepage in the fourth quarter and over a quarter of them were for consumer packaged goods from companies including Philips and Procter & Gamble, the analyst noted.
Amazon is tight-lipped about future plans, but the company has posted over 30 job openings for its display ad business since the end of February.
"We are building next-generation advertising products by leveraging Amazon's world-class personalization technologies, unparalleled customer data and engaging video content," the company said on its website this week.
An Amazon spokeswoman said the company's Product and Display ad businesses are working with "thousands" of advertisers including Procter & Gamble and Microsoft. She declined to share more details.
The ad push shows how Amazon and Google are increasingly clashing over each part of the online shopping process. Google has traditionally dominated when consumers search online for something to buy, while Amazon focused more on the back end - selling products and processing orders.
Google is in talks with retailers about a delivery service that would compete with Amazon's successful Prime program, which charges an annual fee of $79 for free two-day shipping in the United States, the Wall Street Journal reported last week.
"The two titans are going head to head as their businesses are overlapping more and more," said Jeffrey Grau, e-commerce analyst at eMarketer.
A lot of shoppers start product searches on Amazon.com now, rather than Google's search engine. This online traffic, combined with Amazon's data on customer purchases, can help the company create more targeted ads, Grau explained.
"That's got to be very troubling to Google," Grau added. "Amazon is a threat to Google because it's catching consumers earlier in the purchase process."
PRODUCT ADS TAKE OFF
Amazon has been working on its advertising business for at least three years.
Amazon Product Ads has been around since 2008, but it really caught on this holiday season, according to Eric Best of Mercent, which helps retailers sell more through websites including Amazon.com and eBay Inc.
Mercent clients got about 10 percent of their Amazon sales through Amazon Product Ads during the early part of the holiday season, up from almost nothing in the same period last year.
On Cyber Monday, Mercent clients saw year-over-year sales growth of 35 percent on Amazon's third-party marketplace. Sales growth via Amazon Product Ads was 88 percent, Best said.
Companies including HSN Inc, Wayfair, a big online furniture retailer, Wine.com and US-Mattress sell through this channel.
MBM Company got 44 percent of its sales on Thanksgiving though Cyber Monday from Amazon Product Ads. That was up from 4 percent of total sales in the same period of 2010.
"It's really exploded for us," said Jon Ozaksut, e-commerce marketing manager at the jewelry retailer.
MBM has diverted some of its ad spending away from other channels and into Amazon Product Ads, he said.
Like.com used to be MBM's biggest comparison-shopping channel. Google acquired Like.com in 2010 and "sort of depreciated it and is not using it that as much," Ozaksut said. "We spent most of the year looking for a new leader for comparison-shopping-engine sales and Amazon is in that position now."
Amazon Product Ads is also a way for the company to get into categories where it doesn't sell products itself.
Amazon doesn't sell wine, but the company has a new partnership with Wine.com that runs through Amazon Product Ads. When shoppers search for wine on Amazon.com, they are directed to the online wine retailer's website through a product ad in the corner of the search result page.
"It's small now but I suspect it will be much bigger next year," said Wine.com Chief Executive Rich Bergsund. "It's a way for Amazon to participate in wine sales without dealing with all the regulation and complexity of shipping wine across state lines."
(Reporting by Alistair Barr; Editing by Richard Chang)