A little known part of Amazon is growing fast — and directly competes with Google and Facebook (AMZN)

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February 3, 2017 7:16 AM

Amazon may have a surprise winner in a service that directly competes with Google and Facebook's bread-and-butter business: online advertising.

Amazon CEO Jeff Bezos (L) with Google cofounder Larry Page and Facebook COO Sheryl Sandberg

According to Amazon's latest earnings, the "other" revenue from its North America business — believed to be mostly comprised of its online advertising sales — saw the biggest year-over-year jump of any part of Amazon, at 60% in 2016. It recorded $1.3 billion in annual revenue.

Although that's tiny compared to Google's $80 billion in ad revenue, it shows Amazon has been quietly ramping up its online advertising offerings, and could one day be a major threat in the industry.

In fact, during Amazon's earnings call with investors on Thursday, UBS analyst Eric Sheridan pointed out this growth, asking where the company sees its advertising business going longer term.

Amazon's CFO Brian Olsavsky didn't share much, stressing it's "very early," but did agree its online advertising business is a "good strategy" for the company.

Overlooked part of the business

Although Amazon rarely talks about its sprawling advertising business, there's been some speculation that it could end up becoming a major part of the company's overall business.

UBS's Sheridan wrote in a recent note that Amazon is continuing to expand its marketing platform by offering more "sophisticated and targeted" advertising solutions, although its revenue is still small.

"We believe the long-term potential of Amazon's advertising business is still largely overlooked despite Amazon's large reach (over 300m active customers)," Sheridan wrote.

According to Bloomberg's Shira Ovide and Leila Abboud, Amazon's ad business is estimated to have generated roughly $1.2 billion in 2016. If you apply Facebook's operating margin, Amazon's ad business would have made $395 million in operating income last year, a solid 18% of Amazon's total operating income.

During the earnings call, Darin Manney, Amazon's head of IR, cautioned against making a big deal out of the jump in "other" revenue, stressing that it includes revenue from its co-branded credit card arrangements and other types of advertising deals.

Still, Amazon seems to be drawing a lot of attention from industry big wigs, including WPP CEO Martin Sorrell, who, according to Bloomberg, recently said:

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