How Google’s product listing ads business is hurting Amazon

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Google product listing ads becoming a popular option

Google, Inc.’s (GOOG)(GOOGL) product listing ads are the ads that appear alongside a search query. The ads feature a picture of a product along with price details, and link directly to the product page of an e-commerce site, where users can shop online. Google’s product listing ads (or PLAs) have proven more successful than traditional text-driven ads.

According to a report from eMarketer, and as the chart below shows, PLAs’ share of Google’s paid search clicks for non-branded retail searches has increased from 19% in 2Q12 to 50% in 2Q14. For overall retail searches during the same period, PLAs’ share has gone from 12% to 26%.

Google PLA penetration

The eMarketer report says, “PLAs appeared 380% more often in Q4 2013 than they did a year earlier and produced 312% more clicks. At the same time, the success of PLAs led retailers to bid on them more aggressively, which drove up their costs 618%.”

During Google’s 3Q14 earnings call, management said it’s improving the PLA program by keeping retailers’ inventory more organized and up-to-date.

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A threat to e-commerce companies

These developments are not good news for the largest e-commerce players in the US, Amazon.com, Inc. (AMZN) and eBay Inc. (EBAY). To overcome this competition, these companies will have to increase their marketing efforts. Yet, Amazon already spends the most on Google advertisements. This insight was provided by Ad Age DataCenter. And in fact, Amazon spent $157.7 million on ads using Google’s search platform in 2013. Priceline Group Inc. (PCLN), which is the next highest spender on Google ads, spent just over half that amount.

Increased spending marketing would hurt Amazon’s operating margins, which the company can ill-afford. As it is, Amazon announced its biggest-ever operating loss last quarter.

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