Cliff Banks - The Banks Report

Amazon’s Automotive Play

For Autovate 2018 Attendees

September 20, 2018 — Two years ago, Amazon launched its Amazon Vehicles page setting off a flurry of industry predictions the tech giant was preparing to upend and take over the automotive retail space.

Not so fast. Amazon is preparing a huge push into automotive, but it’s not going to be in the sales and distribution arena. So, no big dealer group acquisitions or launches of a distribution network are in Amazon’s near future.

Amazon’s play for the automotive industry is going to be in advertising. It’s part of a much bigger strategy Amazon has to dominate the overall digital advertising market which today is approximately $88 billion with more than 50% controlled by Google and Facebook.

The Numbers

Amazon’s push into digital advertising has been fairly quiet, but the numbers reveal vigorous growth the last several months. The more than $4.2 billion of online ad revenue through the first six months of this year is small when compared to Amazon’s overall revenue of $103 billion. But ad revenue is climbing and is up from $1.8 billion over the same period in 2017. (NOTE: Approximately $640 million of its $2.2 billion ad revenue in the second quarter is from an accounting change required by the Accounting Standard Update). 

The numbers are getting noticed on Wall Street. A few weeks ago, Piper Jaffray analyst Michael Olsen predicted that by 2021 Amazon’s ad revenue will surpass revenue from its AWS (Amazon Web Services) business unit — which has generated more than $11 billion already this year.

Amazon’s Advertising Strategy

Based on recent conversations TBR has had with Amazon along with numerous media reports from the last couple of weeks, the company unofficially is putting the word out that it’s planning an ambitious move in the digital marketing arena.

One of its first moves, announced two weeks ago in a blog post, is consolidating its three advertising brands and retiring their names — Amazon Media Group (AMG), Amazon Marketing Services (AMS), and Amazon Advertising Platform (AAP) — into Amazon Advertising.

This is a clear signal to the market that advertisers will soon see improved and automated marketing solutions and confirms reports we’ve been hearing internally from Amazon the last several months that it is readying a big push in that arena. Amazon believes it has a treasure trove of shopping and purchase data that will enable it to match behavior directly with households and allow for building more accurate predictive models both on product and timing. Amazon’s ability to directly link an ad to a purchase potentially gives it a huge advantage in the attribution wars.

Amazon has already begun working with digital ad agencies, ad tech firms and media companies (such as Oracle’s Data Cloud that’s recently brought its data heft to automotive retail) to develop platforms that simplify the automated/self-serve programmatic ad process.

Below are the products Amazon listed on the blog post that either are now or will be available soon to advertisers (quoting from the blog directly):

  • Sponsored Products and Sponsored Brands allow advertisers to promote their products or brand to make it even easier for customers to discover and purchase products on Amazon.
  • Display ads reach relevant audiences on Amazon and third-party sites and apps using customizable brand or e-commerce creatives, and actionable insights to help advertisers optimize ads to achieve various objectives. Product Display Ads are also available for advertisers who sell products on Amazon to drive traffic to their product detail pages.
  • Video ads help advertisers tell their brand story and engage customers in brand-safe environments via trusted channels like Amazon and IMDb, on exclusive Amazon devices such as Fire TV or Fire tablet, and across third-party sites and apps.
  • Stores allow vendors and sellers to create their own website, with its own branded URL, on Amazon. Vendors and sellers can use a Store to showcase a brand story and product portfolio in a curated customer destination.
  • Our measurement solutions, including campaign reporting, retail insights, and third-party reporting, help businesses understand advertising’s impact on shopper behavior—whether they run on Amazon or on third-party sites and apps—so they can optimize marketing strategies to achieve results.
  • Amazon DSP is a demand-side platform that allows advertisers to programmatically reach their audiences both on Amazon sites and apps as well as through our direct publisher relationships and third-party exchanges. Advertisers can manage, optimize, and report on their programmatic display and video campaigns through the Amazon DSP console.

Although Amazon has a quick runway, it will have challenges to navigate — such as managing data in a way that doesn’t bring regulatory problems, and not getting ad heavy, especially for its Prime subscribers.

The Automotive Play

What does this mean for Amazon’s automotive play?

The advertising strategy is in line with what The Banks Report wrote in August 2016 about what the launch of Amazon Vehicles meant for the company’s overall automotive plans:

“We’re speculating, but it’s possible Amazon is looking at this as a data play. Subscribers have already uploaded 35 million vehicles into Amazon’s online garage. That is a lot of data for potential car shoppers. Add to that, every time a subscriber searches for a vehicle, or part, Amazon has that data — and it’s subscriber specific. Talk about a targeted advertising opportunity — both in sales and service.”

The number now for registered vehicles on Amazon Garage is 110 million (growing at two million a month). The advertising play is so big with such high margins, Amazon can avoid the headaches of trying to get into the distribution or sales of vehicles.

  • First, Amazon wants to be able to control the distribution if it gets into car sales. Selling and delivering cars is difficult and costly and requires a capital-intensive distribution model separate from the other products Amazon delivers. Although Amazon has the money, it makes little sense to invest it in a sector with compressed margins and a difficult customer satisfaction dynamic. We’re hearing no real indication internally that Amazon is trying to create a sales and distribution model it can control — which it would need to do to make that play.
  • Second, Amazon would be limited to used vehicles. New car sales are tightly governed by state franchise laws that dictate any entity selling new vehicles needs to have a license from the manufacturer. And auto manufacturers are not keen on having an entity as powerful as Amazon selling their vehicles. There is a reason AutoNation, Penske Automotive or Berkshire Automotive aren’t larger than they are today — the manufacturers restrict how many of each franchise they can own.
  • Yes, Amazon apparently is testing various models in Europe (see our discussion at the end of this report) for selling cars. Europe is a much different market than the U.S. and doesn’t have similar obstacles outlined above.

Tier 1, Tier 2 and Tier 3 level advertisers (including dealers) can expect a big push from Amazon over the next couple of years to move ad dollars to the online giant. Amazon has three automotive businesses in place already in which a more focused digital advertising strategy should drive significant margins for the company.

Parts and accessories. This is one area of automotive where Amazon is making a big push in sales and distribution. The company entered the $67 billion parts and accessories space in 2017 competing against companies such as Advance AutoParts, O’Reilly Auto Parts and AutoZOne. Combined, Amazon and eBay account for almost 80% of the nearly $8 billion online auto parts market.

Recently, Amazon announced a partnership with Sears in which customers can order tires on Amazon and have them installed at Sears. Amazon also is making a play in the private label business and auto parts may play a role in that strategy. The tech firm today has approximately 80 products it sells via private label including Amazon Basics Full Synthetic Motor Oil which it started selling in July of this year. That number should explode in the next five years.

Amazon likely sees the dealership market as potential partners in the parts business. Partnering with Amazon both at the advertising and actual selling of parts may enable dealerships to further expand their reach into the do-it-yourself market — which up till now has been controlled by aftermarket players and eBay.

It’s also possible dealers will be able to establish Amazon Store Fronts to sell their parts. The Store Fronts is a new initiative for Amazon letting small to medium-sized businesses establish digital storefronts on Amazon.

Amazon Garage.  As of two years ago, more than 35 million people had uploaded one or more vehicles to Amazon Garage. That number is now 110 million. The site enables owners to search for only for parts applicable to their vehicles they’ve uploaded. While it doesn’t allow for VIN or license plate data, it does take make, model and year.

The Garage gives Amazon ownership data on a significant number of vehicles on the roads today. And over the next several months, Amazon likely will begin looking at ways to improve the overall ownership and user experience on the Garage site.

Advertising will be a big part of any improvements to the experience but look for Amazon to begin exploring ways to help dealerships improve the service and repair experience.

Amazon Vehicles. Two years ago, Amazon launched its Amazon Vehicles research page. It’s laid out well and provides product information, vehicle comparisons along with links to manufacturer pages (via a Find a Dealer Near You button). But the fact there is no bridge allowing shoppers to connect with dealerships or with specific inventory is a big weakness.

The question is where does Amazon go with this product. Part of Amazon’s message to advertisers is going to be how it can directly tie an ad click to a purchase for products within the Amazon ecosystem. But Amazon will have a harder time with the attribution message for products not sold on its site — such as vehicles.

One possible solution may be to let dealers create their own digital storefronts on Amazon and use one of the inventory listing tools — such as Cox Automotive’s HomeNet — to list inventory on those storefronts. That still doesn’t solve the attribution question for Amazon because it’s an issue of distribution — it would have to be involved in the sale or distribution in some way for it to be able to claim attribution.

The real question isn’t about a potential disruption of dealers, but of the listing sites, such as Autotrader, Cars.com, Car Guru, TrueCar or Edmunds. If Amazon decides to list actual inventory, it becomes a viable threat to those businesses. But Amazon may decide it’s easier and less expensive to work with those sites instead of trying to recreate the pipelines and processes.

It’s doubtful Amazon knows yet where it will go with its Vehicles page, but at some level, it will have to find a way to link it to real vehicle inventory and its sellers.

Manufacturer Plays

Amazon has partnered with a few manufacturers testing various marketing ideas along with how to insert Amazon into the overall vehicle ownership experience.

Brands such as Audi, BMW, Hyundai, Ford and Toyota now — or will soon — offer Alexa, Amazon’s voice-activated solution, in select vehicles. The company has created an Alexa Auto division and is on a hiring spree with 47 open jobs listed in the new division.

The play with manufacturers goes beyond installing Alexa in vehicles, though.

Hyundai. Earlier this year, Hyundai became the first automaker to launch a digital showroom on Amazon Vehicles. Shoppers can’t buy a vehicle in Hyundai’s digital showroom. They can only research vehicles and then click on a link to Hyundai’s website to find local dealers. In 2016, Amazon and Hyundai also conducted a limited pilot in which subscribers to Amazon Prime Now could request a 45-minute test drive with the vehicle delivered to their home or place of work.

Hyundai’s digital showroom also touts its partnership with Amazon Alexa’s connection with Hyundai’s BlueLink in-vehicle telematics solution.

These tests are not creating any disruption in either the dealer model or in any other business as of yet. At some point, Amazon may pose a threat to the online listing companies (AutoTrader, Cars.com, CarGurus, TrueCar, Edmunds), but for now, the tests with Hyundai are providing the automaker with free advertising. Hyundai’s chief marketing officer Dean Evans is one of the more creative and aggressive in the automotive industry, and he understands the marketing value of developing low cost, low-risk pilots with the world’s first trillion dollar company. It creates a ton of press for little money — in other words, free advertising.

Audi. As part of the ownership experience, Amazon Home Services has built a page for Audi E-tron owners to learn about and select EV home installation services — including scheduling an electrician to install an in-home charger. The E-tron is Audi’s first of three EVs it plans to bring to the U.S. market over the next few years.

Europe

Fiat. Media reports out of Italy in late 2016 indicated Amazon would start selling three Fiat models on its website. Once customers purchase a vehicle, they are directed to a dealer for delivery. Apparently, Fiat added financing deals to the Amazon process in March of 2017.

Other Brands. Based on results from the pilot, Amazon reportedly in 2017 began developing plans to sell cars throughout Europe, beginning in the U.K. The company hired Christoph Moeller, a former automotive industry expert at consulting firm Oliver Wyman, to head its automotive efforts in Europe.

There has been little information and nothing official from Amazon since reports in European media outlets speculated about Amazon’s plans in June of last year.

(The Banks Report will update as we obtain additional information from Amazon and other sources.)

 

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