Amazon's ad business is set to more than quadruple by 2023 - and Google should be worried

Cliff Owen/APAmazon cofounder and CEO Jeff Bezos.Amazon made $9 billion in advertising revenue this year, according to a note from Pivotal Research.A third of budgets come from co-op budgets, where Amazon promotes a brand's products based on how well an item is selling.Amazon's ad business continues to fascinate brands and view it as an alternative to the duopoly of Facebook and Google.Amazon is proving to be the sleeping giant of advertising.In a note to investors initiating coverage of Amazon, Pivotal Research analyst Brian Wieser wrote that he's bullish on the retail giant, especially its nascent advertising business.Amazon made roughly $9 billion from advertising spending in 2018 (bucketed as other revenue in the company's earnings) and is expected to hit $38 billion by 2023, more than quadrupling in five years.Amazon's approach to advertising is centered around helping the company reduce prices consumers pay for products - for this reason, in some ways advertising is a means to an end rather than the end itself at Amazon, Wieser wrote in the note. However, because of Amazon's scale and the desirability of its data and ad inventory, advertising should be able to provide an opportunity for incremental growth that is independent of consumer spending trends.Read more: Amazon wants to give Facebook and Google a run for their money in advertising - here are the 6 execs making it happenRetailers are putting sales dollars into advertisingAccording to Pivotal Research's calculations, roughly $3 million of Amazon's $9 million ad revenue in 2018 came from co-op budgets.Co-op budgets are joint deals between brands and retailers and are based on a percentage of a brand's sales. In exchange for selling products on Amazon's platform, Amazon promotes those products that are selling well, similar to how brands have sold products through retailers and department stores for decades.Co-op funds can vary widely for Amazon. Consumer-packaged-goods brands can invest up to 20% of revenue in such programs but as little as 2%, the report noted.In general we think these budgets should grow at least as fast as Amazon's first-party sales, but they could grow faster as fast-moving consumer goods become increasingly important suppliers of goods to the company, Wieser said.The other $6 million of Amazon's ad revenue comes from traditional digital budgets, particularly from Amazon's growing ad network that places ads on websites outside of Amazon. Other marketers are pulling search funds from Google and reallocating them on Amazon.There's also a decent amount of overlap between the two types of ad budgets.Conversations with large advertisers have conveyed to us that there is no one-size, fits-all approach to budgeting for Amazon, reads the note.Amazon is still tiny compared to the duopolyTo be sure, Amazon's ad business is still far from hitting the same level as Facebook or Google. According to research firm eMarketer, Facebook and Google collected 57.7% of US digital-ad budgets in 2018, followed by Amazon with 4.1%.Still, Amazon's trove of first-party data on what people shop for and look at online makes it a formidable threat to the duopoly, say advertising execs.No other partner right has the level of depth from a consumer knowledge standpoint, Sargi Mann, executive vice president of digital strategy and investments at Havas Media, told Business Insider recently. We're definitely seeing an active trend of marketers getting comfortable with the idea that it's not just a performance platform, it's a brand awareness platform as well.Get the latest Google stock price here. NOW WATCH: Microsoft News' corporate vice president explains how his team avoids fake news sorting through 170,000 stories a day function receiveMessage(event){ console.log(event.data.fullscreen); Android.fullscreen(event.data.fullscreen); }window.addEventListener(message, receiveMessage, false);