Amazon Prime Video’s ad tier has potential to deliver a one-two punch: Better shows and more profits

Published Fri, Feb 23 20246:01 AM ESTUpdated Fri, Feb 23 20247:28 AM EST

The next frontier of Amazon 's fast-growing advertising business is Prime Video. The introduction late last month of a Prime Video ad tier – something also offered by its streaming rivals – advances the company's push to be more profitable. Just weeks after Amazon cut hundreds of jobs across its Prime Video and MGM Studios divisions, the advertisements officially arrived on Prime Video on Jan. 29. But unlike Netflix and Disney+, which offer ad tiers as lower-cost options, Amazon made its ad tier standard for all Prime Video users and is charging an extra $2.99 a month for access to the ad-free version. There's been an undercurrent of displeasure on social media, with people saying it's unfair to make them pay for something they used to get for free. The flip side of that argument is extra revenue from ads should provide additional firepower for Amazon to spend on engaging shows, movies and live sports. That would make the streaming service — and, by extension, the entire Prime subscription, which includes other perks like fast shipping — a more compelling offering to customers. Prime costs $14.99 per month, or $139 per year. In the near-term, both the ad dollars and layoffs should improve the profitability of a video business that's long been viewed as a money-losing endeavor. Taken together, the Prime Video moves stand to brighten the outlook for the company overall, alongside a pickup in growth at its profitable cloud unit, Amazon Web Services (AWS), and improved margins in its vast e-commerce operation. "We have increasing conviction that Prime Video can be a large and profitable business on its own and will continue to invest in compelling exclusive content for Prime members," Amazon CEO Andy Jassy said on its fourth-quarter conference call earlier this month. The ad tier figures to be a significant factor in that conviction. For users who want to pay the monthly fee to forgo the ads, this will flow into and enhance subscription revenue. Crucially, it also should boost the growth of Amazon's increasingly important advertising-services business, which grew 26% year over year in the fourth quarter to $14.65 billion in revenue. That represented nearly 14% of companywide sales, compared with about 12.4% in the year-ago period. AMZN 1Y mountain Amazon's stock performance over the past 12 months. Advertising has become an increasingly important revenue stream for Amazon and other major retailers like Walmart and grocery chain Kroger . Showing ads on a retailer's website — such as a sponsored product on Amazon.com — is perhaps the best example. But the companies are taking other steps to bolster their digital-ad businesses, which are known as "retail media networks." Walmart on Tuesday announced a deal to buy television maker Vizio for $2.3 billion to help grow its ad business . Prime Video's new ad-tier should be a "big differentiating factor for Amazon's retail media network compared to the competition," said Sky Canaves, a retail and e-commerce analyst at Insider Intelligence. Amazon is "the only retailer that owns a significant content business," she said. This gives Amazon first-hand customer data from Prime members it can leverage for advertisers who want to show ads during Prime Video shows. By contrast, Walmart's subscription service to rival Prime, called Walmart+, relies on a partnership with Paramount Global 's Paramount+ to offer its members a streaming service. To be sure, owning Vizio for Walmart – and its SmartCast operating system, which sells advertising – will give Walmart a new avenue in the connected TV market for the data it has on shoppers. Amazon has its Fire TV brand, which also courts advertisers. Amazon is already the dominant retail media network, occupying roughly 75% of ad dollars in the category, according to data by Insider Intelligence. The e-commerce giant believes there's considerably more room for growth on the streaming side. "While still early days, streaming TV advertising continues to grow quickly," Jassy said on the fourth-quarter earnings call. The company is continuously "looking for ways to increase our advertising in our streaming properties," CFO Brian Olsavsky added on the call. Canaves estimates connected TV ad spending — a form of advertising that appears within streaming content — will total $30.1 billion in 2024. Her previous forecast — issued a few months before Amazon announced its ad tier — stood at $29.3 billion. In a note to clients last month, analysts at TD Cowen said they surveyed 54 senior U.S. ad buyers and found 70% were interested in placing ads on Prime Video. Conversely, 17% of respondents said they were not interested, according to TD Cowen. At a basic level, companies want to send their marketing dollars to places where people will see their ads – generating awareness about an up-and-coming apparel brand, touting the features of a new vehicle on the market, or anything else a firm wants to promote. This means streaming services need to have content that viewers spend time watching. Amazon's trove of consumer data – including purchase history and demographics – helps with the attractiveness of Prime Video as an advertising destination because of the targeting capabilities that information can unlock. Additionally, the potential audience for Prime Video is huge – the company has said it has more than 200 million Prime subscribers. Still, actual viewership figures to be a piece to the puzzle. "Ultimately, they'll need to have content that people want to watch and come back to," Canaves said. "That will be critical to keeping audiences engaged in Prime Video, especially if there are ads involved," she added. Right now, Prime Video faces an engagement gap – at least compared to streaming pioneer Netflix, according to Insider Intelligence data. In 2023, users spent an average of 20 minutes per day on Prime Video, compared with Netflix viewers who spent an average of one hour per day on the platform, Insider Intelligence found. One way to boost engagement is spending on can't-miss content, but doing so carries the risk of overspending to the detriment of profits. The Prime Video ad-tier may help Amazon walk that fine line – having more compelling content to keep viewers engaged without denting its improved operational efficiency, a huge theme since the end of 2022 that has helped the company deliver stronger margins. The introduction of ads will enable Amazon to "continue investing meaningfully in content over time," Jassy said on the company's fourth-quarter earnings call – right after he touted increased conviction Prime Video's ability to be profitable as a standalone business. Prime Video keeps putting out new movies and shows like the popular "Lord of the Rings", "Reacher", "Mr. & Mrs. Smith", and "Citadel". Sports is a big part of Amazon's content strategy, too. Amazon's biggest foray into sports is its exclusive, 11-year deal with the National Football League to stream Thursday Night Football on Prime Video. Amazon's broadcast averaged 11.86 million viewers per game in its recently concluded second season, the company said, citing Nielsen data. That's up 24% compared with the inaugural season in 2022. The broadcast made "dramatic year-over-year gains in ad sales," Jassy said on the recent earnings call. Amazon also debuted its first-ever NFL Black Friday game exclusively streamed on Prime Video in November, garnering an average of 9.6 million viewers. The company is looking to make the Black Friday game an annual NFL tradition. Importantly, the game offered the e-commerce giant an opportunity to test out shoppable TV ads for in-stream purchases, with QR codes popping up on the screen that viewers can scan using their smartphones to access holiday-shopping deals. "That would be direct attribution of seeing the ad and making a purchase, the holy grail for advertisers," Canaves said. This ad format is increasingly important as advertising dollars shift toward streaming from traditional TV, which plays into Amazon's strength. "Amazon is positioning itself to be a disruptive force in sports advertising by offering innovations such as targeted ad formats for NFL football audiences, along with AI-powered features to improve the viewing experience and boost fan engagement," Canaves said. Amazon recently landed a deal to exclusively broadcast an NFL playoff game next season, too. It will be the second time a streaming service has exclusive broadcast rights for an NFL postseason contest. Comcast -owned Peacock recently saw big streaming viewership for the Wild Card game between the Miami Dolphins and the Kansas City Chiefs. (Of course, the Chiefs went on to defeat the San Francisco 49ers in the Super Bowl, which Paramount+ streamed and got a massive audience , too.) Insider Intelligence projects digital live sports viewership to grow to 126.8 million by 2027, up about 36% compared with 2023's viewership of 95.5 million. Prime Video, which has a commanding presence in digital live sports, stands to gain from that expected growth in viewership, as more ad spending could flow to its streaming platform. (Jim Cramer's Charitable Trust is long AMZN. See here for a full list of the stocks.) 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