Amazon (Nasdaq: AMZN) and Apple (Nasdaq: AAPL) are perhaps the world’s two best-known companies. The two firms have been dominant, sweeping aside much of their competition.
But what happens when these companies decide to enter the space that is thought to be dominated by the likes of Alphabet (Nasdaq: GOOG), Facebook (Nasdaq: FB) and Tesla (Nasdaq: TSLA)? As the late, great sports broadcaster Keith Jackson would say, “Whoa, Nellie!”
Things are about to get real interesting…
Amazon Goes Big Into Advertising
Amazon has entered just about every sector there is, so why not advertising too? It is taking its most aggressive step yet into self-serve programmatic digital ads by testing a new display ad offering that takes aim squarely at the multi-billion dollar ad revenue stream of Google and Facebook. Google brought in $95 billion from all ads last year, and UBS estimates its display ad network alone will reach $38 billion in revenue this year. Facebook took in $40 billion from ads in 2017.
Amazon’s tool permits merchants that sell on its marketplace to purchase ad spots that will follow customers around the web (the ads will appear on other websites and apps) to try and lure them back to Amazon to make purchases. Amazon is inviting a few select merchants to try the new ad system, beginning in May.
It plans to spend the next year aggressively expanding the infrastructure that it hopes will get more brands buying ad space on its websites and through its ad platform. To do so, Amazon will work with ad-tech companies, agencies and media firms to create platforms that will make buying Amazon ads as easy as using an online shopping cart.
The company has already been using its ads business to boost revenue, helping it get a bigger slice of transactions on its site. Its ad business generated $1.7 billion in revenues last year, according to the research firm EMarketer.
However, the ability to programmatically buy ads on Amazon should be a game changer. EMarketer had forecast that, in 2018, Amazon would generate $3.7 billion in ad revenue worldwide. But in the first quarter of 2018, Amazon already reported more than $2 billion in its ad business: that more than doubled year on year. Its CFO, Brian Olsavsky, said in the first quarter conference call “Advertising continues to be a bright spot from a product standpoint and also a financial one.” Olsavsky added that advertising was a “strong contributor to profitability”.
This aggressive move into the ad space is a smart one for Amazon. First, it is more profitable than just selling things online. Especially since many people actually come to Amazon with the intention of shopping, which is unlike Google and Facebook, where people just do browsing usually.
Second, the digital ad business is big and getting bigger. By 2021, advertising on websites and mobile devices will account for half of all ad spending in the United States, capturing a greater market share than television, radio, newspapers and billboards combined, according to an estimate from EMarketer.
And while most on Wall Street do not see Amazon as a threat to Google and Facebook, I do. First, never underestimate Jeff Bezos. I believe Amazon’s ad business will pull in $10 billion in revenues this year. That is almost half the size of its cloud business, Amazon Web Services.
Second, Amazon comes from a position of strength, with more than 40% of the e-commerce business in the U.S. Both Google and Facebook are bit players there, which gives Amazon a distinct advantage because it has more data on what consumers buy than any other platform. That should drive more business toward Amazon and away from Google and Facebook.
Now, let me fill you in on some interesting happenings at Apple, which is also taking aim at fellow technology giants.
Apple and Autonomous Driving
Some on Wall Street are disappointed that Apple has toned down its ambitions with regard to self-driving vehicles, called ‘Project Titan’.
I am not… it’s not easy building cars… just ask Elon Musk and Tesla.
Instead, Apple is focusing on providing software to vehicle makers to give riders an ‘Apple experience’. It is working currently with a subsidiary of the German automaker Volkswagen (Italdesign, a unit of Lamborghini)to transform about two dozen T6 Transporter vans into electric self-driving shuttles.
That’s not all Apple is doing. It was revealed last month that Apple now has the second-biggest fleet (55) of autonomous vehicles that is being tested on California roads. Apple’s testing fleet has expanded rapidly in recent months. After first receiving a permit to test just three autonomous vehicles in April 2017, the number of vehicles jumped to 27 in January. It has more than doubled since then to 55 vehicles. That leaves Apple second only to General Motors’ Cruise, which has 110 cars testing on California’s roads.
The Wall Street critics say so what… it is still far below the overall fleet of Google’s Waymo and Uber. But as usual, they are missing the big picture. Apple’s autonomous driving program is another addition to its rapidly growing services business, which is moving Apple away from its reliance on sales of iPhones.
Apple’s software and services segment which includes the App Store, Apple Care, Apple Pay, iTunes and cloud services has been a particular growth point for Apple in recent years. CEO Tim Cook knows his firm is too dependent on hardware. In January 2017, he said that he hoped to double revenue from the services segment ($7.17 billion at the time) by 2020. In its latest quarter, Apple reported a 31% year-over-year increase in the segment’s revenue to $9.2 billion.
I’m in agreement with a recent note from Morgan Stanley that said Wall Street is undervaluing Apple’s services business that includes healthcare, augmented reality and original content too. It predicted the company’s services business will represent 67% of Apple’s sale growth over the next five years.
Apple had been leaving money on the table in recent years by failing to capitalize on the rapidly-growing subscription economy. So what better way to play catch-up than a self-driving software play that it can sell to any number of automakers?
And while it is far too early to declare the winners in the race for autonomous driving technologies, I would not count out Apple. It, like Amazon, has an uncanny knack for coming out on top.
— The Option Specialist