Amazon (Not Perplexity and TikTok) Loosens Google's Grip on Search

WSJ dropped a piece over the weekend that will surely gain steam over the next few weeks.

Google’s share of the U.S. search ad market is expected to drop below 50% next year for the first time in over a decade, according to the research firm eMarketer.

The article focuses on AI based searches via Perplexity and keyword searches via TikTok being the main culprit for Google’s loss of share. However, we know the main reason is Amazon’s growing share within retail media. Amazon is closest to end customer purchases and therefore the most justifiable and tangible payback for search dollars. Any major loss of share is due to Amazon at this point.

TikTok Wants Search Ad Dollars

As of today (Sept. 24), the short-form video giant has rolled out its Search Ads Campaign tool, giving advertisers the ability to target ads based on what users are actively searching for. The goal is to turn those searches into ad dollars by matching ads with user intent, and cashing in on exactly what users want.

Long overdue. Can’t fathom why this wouldn’t have come sooner unless there was worry about impacting the search experience. Doubtful.

Perplexity Ad Model

Perplexity has been under fire for scraping sites for content. And now some details have been leaked on how Perplexity will monetize traffic and search queries. Financial Times is reporting that Perplexity will allow brands to bid for “sponsored” questions that allow the brand to provide the AI-generated answer.

If the questions are sponsored and the answers are written by the brand, I struggle to understand where AI comes in. Regardless, there will be an audience and there will likely be a buyer as Nike and Marriott are rumored to be in talks with Perplexity.

Whilst Perplexity is growing quickly ($5mm in revenue in January to $35mm in August based on reports), the “search engine” is still only running 250 million queries per month. That compares to Google at 100 billion per month.

Google & Traffic Acquisition Cost (TAC)

Google Evil has become the focus of media outlets yet I find that very few rational viewpoints on the position we are in with Google and how Google came to be in this position. Benedict Evans summarized it well:

However, there's another virtuous circle: everyone uses Google because it's the default, it's the default because it’s the best and because Google pays other tech companies billions of dollars a year in revenue shares as ‘traffic acquisition costs’ (TAC) to make it the default, and it’s the best and Google has those billions to pay because everyone uses it. In 2022, Google paid Apple about $20bn (about 17.5% of Apple’s operating income, and a 36% revenue share) and other companies $10bn to make it the default, which was close to 20% of Google’s search advertising revenue. And this was the center of the US competition case that was decided this week.

We all knew this in theory (after all, the TAC is right there in the accounts), but this week’s judgement made it a lot more tangible. 50% of search in the USA happens on channels where Google has a contract to make it the default: 28% on Apple devices, 19.4% on Android (the OEMs and telcos decide the default on Android, not Google) and 2.3% on other browsers (i.e. Mozilla) - and then another 20% happens in user-downloaded Chrome on PCs. (Amusingly, the contract means that Google pays Apple even for searches done in Chrome on Apple devices.)

While anecdotal, who do you know that changes the default search engine? It seems very few. Take a look at at the share of Edge and IE which are the few browsers that start without Google.

So what happens from here? I would guess the DoJ makes a similar move to the EU in providing users “choice windows” in which they can select other search engines at time of installation or check-in periods. I would also believe they minimize or shutdown TAC to some degree.

With all that said, is there a formidable competitor to Google that exists today to take everyone’s share? OpenAI is just getting started, Bing has been publicly dissed by Apple. That leaves options like Duckduck and Brave.

Even if given the choice, will users select an engine other than Google? Some yes. The majority? No.

Google Search Queries & AI Summaries

Google continues to tweak their use of AI summaries:

“Now, according to research consultancy Authoritas which has analysed 6,599 keywords across a broad spectrum of categories, AI Overviews are being offered for 17% of queries in the UK and US.”

Publishers are still grappling with the overall impact but there clearly is an impact:

““It’s impossible to say for sure how this will impact publishers – if you are the first ranking site in the new AIO list on desktop then you’ll probably do quite well. One thing for sure though is your current top organic listings are going to get demoted down the page which is going to have a negative impact unless you have a prominent position in the AIO.””

“Press Gazette conducted research on Google AI Overviews durings its previous US rollout in May and found AI-written summaries were being offered for around 24% of the most important search quieries shared by a group of leading publishers. In cases where an AI overview was offered, the organic results (dominated by publisher articles for these queries) were pushed down by an average of 980 pixels (or one full page scroll).”

Amazon Product Reviews Going the Way of Netflix Reviews?

“Amazon (AMZN) is experimenting with removing customer ratings from its product search results page, a test that the retailer says could make it easier for shoppers to scan its vast selection of products.

The “limited test” affects only a small set of products, the company told Fortune on Thursday, and only affects the search results page, with star ratings and review count totals still available on individual product pages.”

Amazon completely killing reviews in search results? No way.

We often tell our clients that only thing that matters on an Amazon listing is the price, reviews and pictures in the carousel. Whilst that isn’t entirely true, Amazon has the most rabid customer eCommerce has ever seen. Conversion rates can be 2-10x better than other competing product detail pages on other eCommerce sites.

I do believe Amazon will continue to test but I can’t see Amazon rolling this out across all searches UNLESS the entire category has a low overall product rating. Remember when Neflix killed rating and shifted to thumbs up/thumbs down? This was clearly a move to “hide” lower reviews as their content splurge started to hit the site. Amazon is no Zalando who in 2023 killed all reviews but don’t be surprised to see some of your searches hiding a few where it will be to their advantage.

Walmart+ Membership

WSJ gave some interesting comments on subscriptions about Walmart+ as they announce the Burger King partnership.

“Walmart+ membership plateaued early last year at around eight million people, including about a million Walmart workers who were offered a free membership as part of their employment, according to a person familiar with the matter.

Membership stagnated at Walmart because some people didn’t pay to continue past their free trial period, but it has since grown steadily in recent quarters, according to people familiar with the matter. Over the past year, Walmart has worked to refocus its benefits and marketing to keep people from dropping out. Walmart+ membership income has grown by 10% or more in the last three quarters, executives have said on recent conference calls with analysts. ”

Delivery Drones Struggle

“DroneUp tells Axios it is closing 18 Walmart delivery hubs in Phoenix, Salt Lake City and Tampa.

It costs the company about $30 to deliver a package by drone, he says. The goal is to get that cost below $7, which is close to ground-based delivery, but much faster.”

Unfortunately we are quite far from drone delivery becoming commonplace in eCommerce. Gradually, then suddenly.

Temu Suppliers Saying Low-Cost Site Squeezes Them $PDD

The Temu growth is incredible. Over 230 million users in more than 70 countries. We often debate how much longer parent Pinduoduo can fund the growth but just take a look at the chart below.

As Temu continues to explode, it seems the China based suppliers and factories are feeling the burden of “returnless eCommerce.” When a customer isn’t required to return an item, the retailer funds sales at no profit AND the parent company is splurging on advertising, the economics aren’t pretty.

“Earlier this year, suppliers such as Xiang said they started to notice frequent penalties amounting to as much as five times the shipment price of their products. The penalty notices usually cited subpar quality or sizes or colors failing to meet shoppers’ expectations, but Temu didn’t provide documentation or offer a way for sellers to appeal, according to suppliers.

“We have no visibility into return information and no contact with shoppers,” said Ke Ling, a Temu supplier based in Dongguan near Guangzhou. “I will willingly accept fines if you show me evidence. How can you not provide any documentation at all?””

Additionally Temu continues to push the marketplace for sellers based in China with US domestic warehousing. Many of these sellers currently sell on Amazon using the Fulfillment by Amazon program.

Without the incentives or overtaxing of current suppliers, can Temu ever dial down the spending and incentives yet keep the customers addicted to the platform?

Amazon's Latest Quarter: AWS Surge, Death by Services & Advertising/Product Slows

Back again for another quarter from the toll booth of eCommerce. Amazon. A couple of takeaways:

1. AWS surges. Whilst the 19% growth increase year over year might seem small. It is an acceleration from prior quarters and is the first $4b quarterly growth figure since 2022.

2. Amazon Services = Margin. Results for margin beat estimates as services grew 15% and product sales slowed to a 4% growth rate. Services contributed to 81% of the total quarterly year over year growth.

3. Despite the positive AWS and margin numbers, one issue is the slowing in Advertising. Prior quarter growth was 24-26% and this quarter was <19%. With product sales only climbing slightly, this isn’t a surprise but definitely one to watch. Is Amazon increasing the Third-party seller services to the detriment of Advertising?

Was there anything to cause worry? No. If you are focused on profits, this was a phenomenal quarter. If you are focused on sales, the core Product business is slowing as Amazon pulls growth lever via Services.

Retail Media: Amazon Dominance $AMZN

It’s no secret that Amazon has positioned itself to be the “toll booth of eCommerce.” Of that toll booth, the fastest growing segment is Advertising which grew 24% in the most recent quarter. With the outsized growth, Advertising now accounts >8% of the total sales with most of that falling to the bottom line.

eMarketer recently provided an outlook thru 2026 indicating that all of retail media will attract more incremental advertising than Alphabet and Meta combined. Of that total $29 billion, Amazon will account for more than 76.3% of that total. Next largest is Walmart with $2 billion or roughly 6.8% of the total retail media advertising. The toll booth keeps collecting change and reports this coming Thursday.

Streaming Ad Revenues: Netflix, Hulu, Disney+, Max, Peacock, Paramount+

With ad based subscribers contributing the overwhelming majority of new subscribers for Netflix, Apple is the only major holdout for ad based subscriptions. With that said, not all are created equal, take a peek at anticipated ad revenue per user in chart below by eMarketer.

International Exposure of S&P 500

Recently I was reevaluating our international positions and came across a FactSet stat: 41% of the revenue in S&P 500 comes from international markets. So if you are invested in just the S&P 500, give yourself a bit of credit for international exposure. Also found the evolution of equity markets over time quite fascinating:

WhatsApp Scale $META

WhatsApp has been thought to be a non-US platform and naturally thought to be due to the lower penetration of Android vs. other markets. Well, Meta seems set on saying otherwise:

“Well, that seems to be changing, with the head of Meta announcing WhatsApp has reached 100 million monthly active users across the United States — with about 10 million in Texas alone. WhatsApp has more than two billion users worldwide.”

Do keep in mind that Meta now has 3.24 billion daily active users earning over $11 in revenue. Wild.

Apple+ Quietly Gaining

Not much movement in the UK for streaming but similar to what we are seeing in the US. Disney creeping up but the major quiet gainer is Apple+ (albeit on a small base). Apple and their quiet momentum. Remember when Apple Pay was nowhere then everywhere?

Amazon: Picks & Shovels of Brick & Mortar (Neiman Marcus & Saks)

Disclosure: I previously worked in Strategy for Hudson’s Bay Company and now run a business focused on Amazon.

“The combined company would have about $10 billion in annual sales, the people said. Luxury behemoth LVMH Moët Hennessy Louis Vuitton, which owns Louis Vuitton and dozens of other brands, had sales of about $94 billion last year.

Amazon would take a minority stake in the new company, which will be called Saks Global, and plans to provide it with technology and logistical expertise, the people said. Salesforce is another minority shareholder. Saks already does business with both tech companies, so the transaction would deepen existing partnerships, one of the people said. ”

It hasn’t been a secret that Richard Baker of Hudson’s Bay Company has had his eyes on Neiman Marcus. As the luxury department stores shrink, the focus is on maintaining the A quality stores, building mass against the luxury brand houses whilst consolidating back office operations and taking a bet on the longer term value of the real estate. Including Amazon in the mix has been a rumor that now seems to be true.

Amazon has long sought success in luxury fashion. There has been the launch of Amazon Luxury, the opening of test stores and the acquisition of flash sale sites that sold off-price luxury like MYHABIT. We know Amazon wants to be the toll booth of eCommerce, continue to face FTC pressure and largely struggled with brick & mortar. This type of deal seems to allow Amazon to run the piping, picks & shovels of brick & mortar plus ease the FTC. Quite an interesting deal.

Costco Building Housing

Why not attach housing to your store if it provides ease for approval? Well played Costco.

“The company plans to open a new store in South Los Angeles and has teamed with developers Thrive Living and architects AO to build an 800-unit apartment complex — with 184 units set aside for affordable housing.”

“Cohen speculated that Costco tacked the apartment building idea onto its plans for a large storefront on the property to avoid Los Angeles’ often costly and drawn-out site review process.

He told SFGATE that at least two-thirds of the 185,000-square-foot plan must be allocated toward housing under state law for Costco to enjoy a quicker, cheaper building process.”

Robinhood Looks Compelling $HOOD

Disclosure: I have a small personal position in Robinhood common stock, use the platform for trading and have recently opened their credit card.

One can’t forget the craziness of Gamestop and Robinhood during the pandemic. One can’t forget the “free” trading being paid for by market makers like Citadel that Robinhood was called out for. However, you can’t help but notice what they are doing differently. The recent Gamestop news was a catalyst to check-in on the Robinhood stock. After a review and some use of their newer products including 24 hour trading, I do see a path to market share gains and stock appreciation.

What’s to like?

1. Aggressive push for assets. Robinhood provides a 3% boost on retirement account contributions. Robinhood provides 1% pay out on any deposits that STAY on the platform either via trades or savings. Robinhood provides a 1% boost on any retirement account transfers. Some are paid out immediately, some are paid out in time to ensure the funds remain in the account.

2. Credit card stickiness. The formal launch of the credit card provides a new revenue stream also a stickiness factor to existing traders on the platform. The product is impressive with immediate points redemption pushed to your brokerage account earning 5% in interest or ready for trading. The best part? The card pays 3% on every purchase. The card also offers a 5% cash back when booking travel but I have found the travel portal lackluster.

3. Subscription model. Just over 7% of the funded customers are part of the Gold club. The subscription model isn’t providing significant revenue but does provide a loyalty to the platform. This model can be credited with growing assets under custody and net deposit growth.

Are there concerns? Sure. Has the funded customer count growth been relatively weak? Yes. Can these incentives continue forever? Unlikely. My bet is the incentives for assets can continue for as long as needed to catch enough flies in the trap. And ultimately see significant stock price appreciation.

Lucid vs Tesla

Not an owner of a Lucid nor a shareholder of Lucid but how can you not be intrigued by statements from Peter Rawlinson of Lucid?

“I think that the, the mantle has has passed to Lucid. I think Lucid is now at the cutting edge, huh? I think we are the company with a true sense of mission. This week. I was proud to announce that we’d created a landmark number in the development of the ev, which is gonna have a profound impact upon the planet. And that is achieving five miles of range per kilowatt hour of energy.”

“But for a more affordable family car, it’s over 40%. There is no gasoline engine car equivalent to this imbalance of cost. So what we are doing at Lucid is addressing the cost of the batteries. And we are doing it in an unorthodox way, rather than saying, right, can we make batteries cheaper? Through an economy of scale, we’re actually saying, do we need that many batteries in the first place? Can we go further with higher technology? We’ve reinvented the electric motor. We have reinvented the inverter to go further with less batteries in the first place. And so if you look at our products today, if you look at the Lucid Air Pure, we’re able to do the car that’s in production right now for any journey you take from A to B, whether it’s from home to the office, down the shops on your vacation, you will use less electricity to go from A to B than any other car on the market today, bar none. And because it’s the most efficient and because you’re able to use less electricity, not only will it cost you less as a user, but it means you don’t have to carry such a large battery pack around. And that means better use of the world’s precious resources, less mines for lithium, nickel, cobalt, less dependence geopolitically in this world for the us. And this is of a profound significance. We can go further with less through technology.”

Pay In a ChatGPT World

Freelance jobs are down by as much as 21% and now Upwork is providing a study on impact to pay by job category and level of value (screenshot below). We are years away from understanding the impact to workforces globally yet I still believe those who use AI in their daily tasks are likely to replace those who don’t.