Big Tech companies are not one-trick ponies. They’re complex businesses that do everything from slinging music and building hardware to running massive consumer and business platforms. They also make piles of money from advertising.
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Now the U.S. has posted better GDP growth than many expected, so we wanted to see just how much money Big Tech companies made from advertising in Q3. While selling ads is not a technology business, these companies are big enough to leverage their scale and reach to offer compelling advertising solutions.
Why wouldn’t they? Advertising is a terrific business for tech companies, even for the ones that are not primarily advertising as a way to make money.
Let’s check in on advertising results from Amazon (e-commerce and cloud), Alphabet (search and cloud), Microsoft (business software and cloud) and a few other names. The gist is that if you have big reach, you make big bucks, and if you have AI chops as well, your ability to pull in advertising dollars could grow even stronger.
The Amazon of ads
We only have to look as far as Amazon to find the key to one of the main trends at play in the advertising market.
“Most advertising-heavy companies have struggled growth-wise as the economy has been difficult. And while we see companies being more cautious on the ad side and the top-of-funnel products, things like display and a little bit of video, we’re still seeing a lot of strength in the lower-funnel ad products, like sponsored products,” Amazon CEO Andy Jassy said in the company’s third-quarter conference call.
You could think of low-funnel as “last-mile advertising.” It isn’t about raising brand awareness; it’s about finding people right when they intend to make a purchase, and make sure they buy your product.
Sellers are seemingly willing to spend on this type of low-funnel advertising, which shows that they know demand is somewhat resilient. “Even in a harder economy, there’s going to be a lot of e-commerce purchasing,” Jassy said. It also shows that like Instacart, Amazon knows that selling stuff is an advertising game to a large degree. (Instacart’s advertising business was key to its recent IPO.)
That demand for low-funnel visibility has clearly benefited Amazon. Its advertising revenue reached $12 billion last quarter, up 26% from a year earlier. And it’s not just that people come to Amazon with an intent to buy stuff — there are simply lots and lots of them. It’s this combination that sellers want, Jassy noted. “When they have to think about budget decisions, they’re going to choose the [ads] that have large volume and perform better,” he said.
Amazon also hopes that machine learning and AI will boost ad performance. It recently introduced a PhotoRoom-like generative AI tool that lets advertisers enhance product images. While it is unclear if there’s AI involved, the company is also mulling over new formats. “I think we have barely scraped the surface with respect to figuring out how to intelligently integrate advertising into video, into audio and into grocery,” Jassy said.
The result of these tailwinds and efforts is that Amazon is catching up with other advertising giants. It is still a distant third after Google Search and Meta in terms of ad revenues, but it is already ahead of YouTube’s $7.95 billion tally for Q3, despite the latter’s 12.5% year-over-year increase.
Google is not done
What made Google into the advertising giant that it is today? Lots of factors, including better search engine tech early in its life. Perhaps most important was the fact that its service sits close to consumer intent. Folks searching for something want something, and often they want to buy it. So, Google can offer advertisers a very clear way to advertise to tailored audiences who likely have a credit card nearby.
The same factors that make Amazon’s advertising business hop are at play at Google (Alphabet’s profit source) as well. Recall that Alphabet reported better-than-expected profit and revenue in the third quarter. That was despite its cloud business doing worse than analysts had expected — ads really came through for Alphabet.
This theme of proximity to intent and how it impacts search also applies to Microsoft. The Redmond-based company reported that “search and news advertising revenue ex-[traffic acquisition costs] increased 10% and 9% in constant currency, slightly ahead of expectations.”
From strength to strength
Strength today doesn’t necessarily guarantee future performance, though. Are Big Tech companies at risk of losing their edge? Not really. There’s something else that Big Tech companies can rely on in the coming years: AI.
Big Tech couldn’t stop talking about AI this quarter either. Here is a selection of quotes from Philipp Schindler, SVP and CBO, Google, on Alphabet’s earnings call:
- “Let’s start with Google AI. Recent dramatic advances in everything from foundational research models, to LLMs, to generative AI are improving our ability to deliver better performance and profitability for advertisers and more helpful, delightful experiences for users.”
- “AI is helping advertisers find as many people as possible in their ideal audience for the lowest possible price. Early tests are delivering 54% more reach at 42% lower cost.”
- “Nearly 80% of our advertisers already use at least one AI-powered Search Ads product.”
If AI can continue to offer better value to advertisers, Google will find itself close to consumer intent and able to offer advertisers access to consumers for less than its competitors. That’s a winning formula if we’ve ever seen one.
From Meta’s earnings call, here’s an extended set of notes on AI and the ads business from Mark Zuckerberg:
- “AI advances are driving a lot of our product and business performance. Generative AI will increasingly be important going forward. I outlined our product roadmap earlier, and on top of that we’re also building foundation models like Llama 2, which we believe is now the leading open source model, with more than 30 million Llama downloads last month.”
- “Beyond that, there is also a different set of sophisticated recommendation AI systems that powers our feeds, Reels, ads, and integrity systems. And this technology has less hype right now than generative AI, but it’s also improving very quickly.”
- “AI-driven feed recommendations continue to grow their impact on incremental engagement. This year alone, we’ve seen a 7% increase in time spent on Facebook and a 6% increase on Instagram as a result of recommendation improvements.”
- “Our AI tools for advertisers are also driving results with Advantage+ Shopping Campaigns reaching a $10 billion run rate and more than half of our advertisers using our Advantage+ Creative tools to optimize images and text in their ads creative.”
There are two important points to note here. First, AI is helping Meta build a better advertising business, and second, it is helping Meta drive more supply by boosting the time its users spend on its platforms. That means that AI is helping on both the demand and supply sides.
Microsoft noted in its own recent earnings call that it has seen “increased engagement on Bing and Edge share gains again this quarter,” with revenue growth from search coming in ahead of expectations. What is driving those gains? “Bing users have engaged in more than 1.9 billion chats,” the company noted — that means its new AI-powered services are resonating at least a little with consumers.
The company has also worked to integrate its AI tech into its browser, Edge. Market share gains in the recent past could also be partially predicated on AI-related work at the company.
In closing, we can see now that Big Tech has had a massive opportunity to build humongous advertising businesses, and they have capitalized on it to become very, very profitable. And with AI changing how consumers and businesses operate, it seems that Big Tech is well-poised to keep growing their advertising incomes.
Now, this isn’t all sunshine and roses. Microsoft is adding more ads to Windows over time, and we cannot understate how much we detest that. Ads inside products you already own is bad enough, but this creates a set of negative incentives at Microsoft to share even more user information.