Amazon.com Inc. AMZN +0.90% is gearing up to more directly challenge Google Inc. GOOGL +0.29% 's dominance of the online advertising market, developing its own software for placing ads online that could leverage its knowledge of millions of Web shoppers. Initially, Amazon plans to replace those ads on its pages that Google chiefly supplies with a new in-house ad placement platform, said people familiar with the matter. In the future, that system could challenge Google's $50 billion-a-year advertising business and Microsoft Corp.'s MSFT +0.18% , they added.
The Seattle-based retailer already has a limited business placing ads on other sites. In a sign that it has larger goals, Amazon is testing ways to expand that program with new types of ads.
"Amazon could use the data it has about buying behavior to help make these ads much more effective," said Karsten Weide, an analyst at researcher IDC. "Marketers would love to have another viable option beyond Google and Facebook FB 0.00% for their advertising."
Amazon has told potential ad partners that it may begin testing the new placement platform, dubbed Amazon Sponsored Links, later this year. The plan, these people said, is to make it easier for marketers to reach its nearly 250 million active users.
The two companies have increasingly been treading on the other's turf as they battle to be the first place that Internet shoppers go to hunt for products and services. Google, for instance, has been invading Amazon's e-commerce business with its product-listing ads and Google Shopping Express for delivery. Amazon has launched its own smartphone and also competes with Google in online storage services.
Amazon and Google declined to comment.
"Amazon knows a lot about how people are searching on the site and consumer preferences and histories. It can use that to tailor advertising in ways that probably nobody else can," said Reid Spice, vice president of media at digital agency iCrossing.
The people familiar with the matter said Amazon's offering would resemble Google's AdWords, the engine that Google uses to place keyword-targeted ads alongside Google search results and on more than two million other websites. AdWords is the foundation of Google's roughly $50 billion-a-year advertising business, and Google counts Amazon as one of its biggest buyers of text link ads.
"Keyword" programs match a search phrase such as "running shoes" and show ads for a shoe retailer on the Web pages that the search delivers.
Amazon now displays several types of ads on its pages, including text-based keyword ads placed by Google and other third parties, as well as product ads that Amazon places itself. EMarketer estimates that Amazon will sell nearly $1 billion in advertising revenue this year, up from more than $700 million last year.
To displace the Google ads on its site, Amazon is building a tool to help advertising agencies buy in bulk for potentially thousands of advertisers, the people familiar with the matter said. Building such a system could enable Amazon to boost its business placing ads on third-party websites. Google offers similar capability for advertisers using AdWords.
Amazon today has an "affiliate" program that offers websites Amazon product ads and pays small commissions when those website users click through and buy a product on Amazon. To attract more websites, and help their owners earn more, Amazon also is testing a way for them to get paid any time a user sees an ad; that initiative was earlier reported by the technology blog Zatznotfunny.com.
Amazon would face big hurdles trying to compete with Google to place its ads on other sites. AdWords launched in 2000, and with more than one million advertisers vying for ad space on the platform, prices get pushed higher—a big attraction for other publishers to use the system. Google says it paid more than $9 billion to outside websites in 2013.
For Amazon, more advertising offers the prospect of more revenue and potentially higher profit margins. Amazon remains primarily a retailer, buying goods from suppliers and selling them to customers with small markups. The company operates on notoriously thin profit margins, and frequently posts losses, as it invests for expansion.
Google's ad-supported business is highly profitable. It generated more operating profit in the first six months of this year than Amazon has since it was founded 20 years ago, according to researcher S&P Capital IQ.
Amazon has other reasons to want Google's keyword ads off its site. It doesn't control the pricing of such ads, Google does. Nor does Amazon want Google to capture data about its customers, based on their searches and which ads they click on.
As Amazon seeks to mimic Google's cash-cow business, Google itself has remade product ads on its site to look more like Amazon's, with images, prices and customer ratings.
Amazon is a big buyer of traditional text ads on Google, but doesn't buy the enhanced product ads. Industry analysts say Amazon doesn't want to share with a top rival details about products and inventory that are a requirement for running those ads.
—Jack Marshall contributed to this article.
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