Ad rev tussle: How merchant media is muscling in on search & social

As companies around the world ring in their quarterly reports, industry watchers were quick to spot an interesting development. While the usual suspects of Alphabet and Meta continue to laugh their way to the bank, ad revenues were increasing elsewhere as well, and in an unexpected quarter.

Google's ad revenue rose to $58.14 billion, up from $56.29 billion last year, while YouTube ads came in at $7.67 billion, up from $7.34 billion the year before. Meanwhile, Meta’s advertising revenue for Q2 2023 was $31.5 billion compared to $28.2 billion in the same period in 2022.

However, it was noted that Amazon had also generated $10.68 billion from its ad services in the second quarter of 2023.

As Karan Taurani, SVP – Research Analyst (Media, Internet & Consumer Discretionary), Elara Capital points out, "Amazon’s ad revenue report shows a YoY growth of 21%, outperforming social/search tech giants, which indicates shift of digital ad revenues towards commerce segment globally; the company continues to use AI and Machine Learning tools in order to drive better ROI on advertising for clients."

Coming in from a parallel track, Anmol Dang, AVP, Media, FCB/SIX India points out that India is hitting a new high in UPI transactions every month, and as of May 2023, the numbers hit 9.41 Billion transactions, which only shows how the people of India have slowly become comfortable with online modes of payment, which has been a very big indirect contributor to increase in online commerce.

And there the twain have met.

“This is a fair indicator for platforms like Amazon, Flipkart and others to gear up as more robust advertising avenues against the existing offerings. Social commerce has experienced a remarkable growth rate of around 85% CAGR over the past two years, and it's projected to maintain a similar, if not even more accelerated pace in the future,” says Dang.

“Flipkart and Amazon have already developed their own demand-side platforms (DSPs) based on rich e-commerce data. These DSPs are integrated with third-party ad SSPs/exchanges, enabling a programmatic way of buying. While these are currently closed walled gardens, as the offerings are only available on the native DSPs developed by the respective e-commerce players, I see an emergence of specialized e-commerce-specific ad networks. These networks will provide an easy-to-integrate native e-commerce ad product for mid and long-tail e-commerce companies,” says Chirag Bhatia, Executive Vice President and Business Head - Digital, DDB Mudra Group.

Merchants' Media

According to experts, the most recent quarter saw a swing towards “merchant media”, a trend that began during the Covid pandemic, but is really starting to show its effect now, in a market that was previously dominated by Search and Social, which may as well serve as placeholder categories for Alphabet and Meta respectively, given their market dominance. 

e-commerce platforms like Amazon, and more locally BigBasket, are leveraging machine learning and AI to increase the relevancy of the ads shown to customers which in turn, improves its ability to measure the return on advertising spend for brands.

According to Bhatia what makes these platforms stronger destinations for advertisers to invest their marketing dollars is the combination of rich intent data, coupled with an advertising ecosystem where the product is available for immediate purchase on the same platform.

Dr Kushal Sanghvi, Head - India and SEA of CitrusAd, which works with both BigBasket and Pharmeasy says that advertisers are looking to expand their horizons “beyond good old Search & Social with CTV and e-commerce media or merchant media being the new segments that have really developed in the last two-three years on the back of the pandemic and the resulting change in consumer habits. As a result, e-commerce platforms are seeing a lot of traction as an advertising space.”

“We have over 200 brands coming in with their agencies to advertise on BigBasket, and another 110-plus brands on Pharmeasy, and they are happy to have access to the markets that these platforms have built up over the years, and have access to real-time data, meaning they can directly engage with consumers,” says Sanghvi, adding that e-commerce platforms have become increasingly mindful of the goldmines they are sitting on, and look to technology partners, like CitrusAd, to be able to leverage their data, and become an attractive advertising destination.

“In the US, by 2024, e-commerce will be third behind search and social in terms of ad spends, and India is not far behind,” says Sanghvi. With customers shopping in real-time in these e-commerce walled gardens that exist simultaneously within and yet distinct from the Googles and Facebooks of the world, it allows brands to learn from and react to customer engagement more directly.

Unny Radhakrishnan, CEO of Digitas India also ascribes this increasing interest in merchant media to the “last-mile opportunity” that e-commerce sites offer to advertisers to engage with their customers. “Whether it’s on Amazon, or BigBasket, or other online marketplaces, consumers are looking for specific categories and products. Brands have realized that these are ideal places to advertise their offerings, as consumers are coming in with the intent of making a purchase,” he says.

Ritika Taneja, Head of E-Commerce, GroupM India points to Amazon, saying its “remarkable quarterly ad revenue surge, compared to more modest gains by social and search platforms suggests a rising role of e-commerce in driving advertising revenues. The possible ascendancy of e-commerce platforms could be attributed to their distinctive advantages, including a captive audience in a buying mindset, granular targeting fueled by extensive consumer data, and concrete metrics for gauging ROI. This trend could prompt advertisers to pivot toward platforms that offer a more direct route to sales.”

But still, Google it

Radhakrishnan says that while this means advertisers will be looking to diversify their ad spends, and this will translate into some funds being diverted from what would otherwise have been spent on Alphabet and Meta platforms, it’s too early to say how much the impact will actually be, given the market share enjoyed by them.

Taneja agrees, saying, “It is important to note that social and search platforms still have a larger share of the advertising market. Social and search platforms continue to maintain their power in ensuring a wide reach for brands and campaigns focused on content. The evolving landscape underlines the necessity for a diversified approach for advertisers, leveraging a mix of channels to effectively engage diverse consumer segments.”

 “In my personal view, I don't perceive a substantial impact on Search or Social platforms either. This is exemplified by the introduction of campaign types like Performance Max and Advantage+, which are strategically designed to enhance commerce sales on Google and Meta platforms, respectively. These platforms have adeptly embraced the commerce aspect of digital business,” says Dang.

This outcome is largely driven by the higher profitability associated with a brand's direct-to-consumer (D2C) website and app. The commissions levied by major commerce players often squeeze smaller businesses, leading them to operate with minimal profit margins. Consequently, the significance of the D2C ecosystem has increased, directly influencing brands to promote their businesses across Search and Social platforms.

“Unless the costs associated with selling on large commerce platforms is restructured, the D2C approach will continue to seem lucrative for small businesses, Google's anticipation of this trend is evident in their implementation of improved commerce solutions,” says Dang adding it is worth noting that a significant portion of online traffic is still directed by Google sites.