How to make $100B slinging ads

If time proves Canadian philosoper Marshall McLuhan right and the medium is truly the message, commerce directly becoming the dominant distribution channel for advertising is the logical endgame of American capitalism. For now, it’s simply called retail media.

Always eager to reach their grubby appendages into emerging pools of money, large consulting firms have taken notice of this space. Boston Consulting Group predicts that retail media will reach $110B in revenue in 2026, with $75B coming to retailers as pure profit.  Not to be outdone, McKinsey pontificates that retail media will drive a $1.3T domino effect, whatever the hell that means. No word yet on how much of that will be spent in the $5T metaverse. 

Consultants have a poetic way of making everything more confusing than it really is, because well, that’s the business model. So allow me to explain what is actually happening here. Today the abstract concept of retail media is, by and large, sponsored products in searches on Amazon. Amazon’s ads business will end the year somewhere around $50B and is still growing at ~25% YoY. While they have a nascent DSP product and ramping up offsite partnership activations, the vast majority of these dollars come from little boxes in search results that your favorite brand or Chinese factory operation is paying for. 

In a very distant second, Walmart Connect will likely net out in the $4B range, with the vast majority coming from onsite sponsored products. The longtail of retail media products is a who’s who of pretty much any big retailer in the game. Target (Roundel), Home Depot, Best Buy, Lowe’s, Kroger, Instacart, Albertson’s, Nordstrom, Walgreens, CVS, Ulta, Macy’s, Chewy, Dollar General and even Michael’s Crafts have media divisions of various complexities. Sponsored listings in search are the bellwether product for pretty much all of the retail media networks but the greatest hits of ad tech— primarily in the form of offsite retargeting— are starting to creep into the picture. First party data businesses such as Walmart Luminate are the new old thing and have the potential to add billions of incremental dollars as well by the end of the decade.  

As an aside, being a sales rep in an emerging new advertising marketplace is an absolutely great gig. I joined LinkedIn’s marketing solutions team in 2015, about a year after almost every advertising sales rep seemed to bank enough money to buy a swanky house in the East Bay. I left because I was 23 years old, stupid, and too high on my horse to just sling some ads. I’ve had an eclectic mix of startup experiences in the decade since and I wouldn’t trade it for the world but if I’d have just worked my way up the LinkedIn ad sales ladder, banked a quarter mil a year and put 20% of that back into Microsoft stock which has casually 8x’d since 2015, I’d be a wealthier boy. If you have the chance to get in on the ground floor of one of these operations, do it. 

As much as it pains me to see it, the consultants are on to something here with their gaudy market size predictions. On a five and ten year horizon, retail media is going to get a hell of a lot bigger and more complex. So what does it all mean for well, retail and the media?  

Product search and the innovator’s dilemma 

Earlier this year, Amazon shuttered the Onsite Associates program, ending a five-year experiment to embed expert review content from media publishers in their product search experience. In and of itself, this was not particularly big news outside of the hardcore Amazon ecosystem. The Onsite Associates program was highly opaque, quietly powered by a network of third-parties, and lived in a weird sort of strategic limbo at Amazon. While an estimated 25% of product searches were served editorial recommendations, Amazon never seemed truly sure what to do with the program.

As with every strategic decision Amazon makes, the company tried to spin it as a move grounded in customer centricity. Here’s what spokesperson Keri Bertolino told Modern Retail about the change:

Let’s not kid about what happened here. Amazon effectively removed a cost center to their business and replaced it with more juicy ads real estate.

For their part, Amazon sellers largely welcomed the change. To many, Onsite Associates felt like a who do you know black box while at least with ad inventory, you can always win the real estate if you’re willing to pay the piper for it. And who knows, maybe Amazon shoppers both clicked and converted at a higher rate on ads vs. independent editorial recommendations, especially when Amazon effectively stripped the publisher’s branding.  

But even if this is all true, Amazon dialed down evolving its product search experience in the service of driving more dollars tomorrow in favor of making more ad money today. In this way, retail media is the perfect example of the innovator’s dilemma in action. In Bezos terms, it’s a bit of a day two business. 

Ultimately, any retailer’s long term success depends on providing either the most convenient or delightful experience to their shoppers. If you ask any Amazon, Walmart or Target shopper what an ideal product search interface looks like, few will tell you that they’d like to see more ads pushing the boundary of relevance. But here’s the thing–when a product has 70%+ EBITDA margins, you’re gonna see companies max the everloving shit out of it.    

Amazon will tell you that there’s no inherent reason why ads can’t be value additive to the shopper experience because, well, they have shareholders and narratives to tell Wall Street and such. But I prefer this explanation from Marketplace Pulse. 

As half-hearted as it was, one could easily argue that Amazon’s inclusion of publisher results in search was their boldest experiment in changing the core customer facing product discovery interface. It was an attempt to overcome the paradox of choice by presenting shoppers with a curated list of recommendations. But crucially, it was fundamentally at odds with a company that makes the bulk of its current profit selling ads.  

Cui bono?

Retail media is not a zero sum game enterprise. The creation of massive swaths of new, highly performant ad inventory on Amazon and other retailers increases the total addressable market of commerce and creates incremental opportunity for new brands to quickly come to market. The fact that more and more of them are direct from China operations notwithstanding, this is an overall net positive for American industry. 

However, most of the dollars aren’t manufactured out of thin air. And lord knows, Facebook and Google (does anyone trust any nerd that calls these companies Alphabet and Meta?) seem to be doing fine so the big loser in the retail media evolution is once again, conventional media. 

Today, Amazon is an existentially important partner to many of the nation’s largest media conglomerates who refer billions of dollars in sales every year via the Associates program. So Amazon is simultaneously one of the biggest supporters and among the greatest threats to what’s left of the legacy mass media business model. 

Procter and Gamble is under no civic obligation to buy shitty display ads from legacy publishers that don’t convert in the nebulous service of American journalism. If there’s more money to be made on Amazon, that’s where they owe it to their shareholders to invest. But when a large CPG brand does a seven figure advertising and affiliate deal with Conde Nast, in some way it supports months long New Yorker investigations into the impunity of the rich and powerful. 

When that money goes to Amazon, some guy gets an even bigger boat. 

Buon’ Natale

I kid you not, 12 (!) different subscribers to this newsletter have texted me over the last two weeks asking me for my opinion on Giants QB Tommy “Cutlets” Devito and his agent, recent Italian-American Sports Hall of Fame inductee Sean Stellato.

I don’t know man, all I can say is these look like guys that will give you a ten minute monologue on where to find the best gabagool in North Jersey but would have blank stares if you asked them to pass the capocollo. Also the absolute disrespect shown for Marsala in this video and the ranking of penne ala vodka over linguine with clams and bolognese has me ready to go to the mattresses.

Everyone loves a good Christmas conspiracy so here’s mine. Three generations ago the Devito and Stellato families were bored WASPs named Clarke and Turner who thought it would be funny to do a bit as the most aggressive caricature of Italian-Americans possible. Somewhere along the way, they realized it was just a superior lifestyle and forgot to drop the act. We had them at sambucca and espresso.

Merry Christmas from my little cutlets. I’ll catch you in the new year!