• by Karlene Lukovitz  @KLmarketdaily, January 4, 2024

Amazon’s move to add advertising to Prime Video could generate about $3 billion in incremental revenue from ads this year, and another $1.8 billion in payments from consumers who want to avoid the ads, according to a new analysis by Bank of America analyst Justin Post.

As everyone in the entertainment industry is keenly aware, Amazon will begin inserting ads in Prime Video content in North America as of Jan. 29.

Users who want to continue an ad-free experience will have to start paying $3 per month more. That means paying $11.99 instead of $8.99 per month for a standalone subscription to Prime Video, or paying nearly $18 per month ($175 per year) instead of the current $14.99 per month ($139 per year) for an Amazon Prime membership, which includes Prime Video.

Post’s estimates assume that 70% of Prime members will accept ads rather than pay the higher fees, Bloomberg noted in reporting on the analysis.

While still a small part of Amazon’s overall revenue, advertising is its fastest-growing stream. In last year’s third quarter, search and display ads on its web store generated $12.1 billion, or 8.5% of total revenue in the period.

Even for Amazon, $5 billion, or $3 billion, isn’t pocket change.  

And no one doubts that Amazon, with its scale and resources, will be a formidable competitor for ad dollars spent in the streaming video sector. Perhaps even for some linear TV ad dollars — particularly given Amazon’s billions in spending to secure streaming rights for key NFL games and other sports once firmly controlled by traditional TV networks.

Let’s not forget that for Amazon, Prime Video doesn’t necessarily need to be hugely profitable in and of itself (although that is no doubt the goal). It is not only part of the Prime membership plan; it is one part of a many-tentacled strategic model designed to grab consumer dollars from every conceivable channel and business (including health care!), lock them in through automatic renewal, and make it extremely inconvenient to opt out or change suppliers.  

Although the industry might hope that Amazon’s entry into the streaming ad game will help to float all boats by serving to further whet media buyers’ appetite for connected TV in general, another analyst cast doubt on that premise earlier this week.

Writing in his Madison and Wall Substack publication, Brian Weiner noted that historical trends suggest that more entrants into the streaming advertising game are not great news for competitive streamers, including the majors operated by the big legacy companies that also have traditional TV businesses.

Using Antenna and Nielsen data, Weiser pointed out that while available ad inventory in streaming environments has been rising — up 12% year-over-year during November — total ad inventory across linear and connected TV was down by 5% over the same period, despite growth in total use of TV sets of 6%.

The reason: “The relatively high volumes of ad-free viewing and high shares of ad-free subscribers continue to displace relatively higher ad-load/ad-supported viewing on linear TV (at around 12 minutes per hour)” and “a significant share of the growth in TV viewing originates with YouTube,” which rose from 7.5% of total TV consumption to 9% YoY. (“The issue wouldn’t look quite as bad if more advertisers included YouTube as part of their TV buys,” Weiser added in a post in his Madison and Wall Substack publication.)

Although the still relatively new-to-advertising Netflix has upped the number of subscribers taking its ad-supported tier to 8%, and Disney+ is at 20%, that doesn’t add up to any big impact on the broader TV advertising scenario, he says.  

“To reiterate what I’ve found to be true over many years of studying the industry: There is a relatively fixed pool of spending from marketers, and changing the data or targeting or where the inventory runs doesn’t alter that pool by much, if at all,” Weiser wrote. “There is no meaningful evidence I’ve seen to suggest that new marketers who take advantage of whatever data advantage connected TV offers bring in any meaningful new money, any more than any other category that comes and goes from the medium, or any different than traditional direct response advertising, which was a form of performance media or outcomes media before anyone used those descriptors. Instead, because the pool of spending is relatively fixed, it’s all about the ‘share of wallet’ that any one seller of advertising can capture.”

Bottom line: This means that gains in advertising share by Prime Video, or Netflix, “will come at the expense of others.”

Weiser argues that, at least for those incumbent TV network owners, real revenue growth will not come from streaming advertising alone.

Instead, they need to “more aggressively embrace a definition of TV that includes video in all of its forms and collectively invest around an ecosystem that better includes the likes of YouTube, TikTok and video that runs everywhere” to create a growth story and support tools and processes that will support spending across video and bring newer advertisers into a fold that includes traditional TV, he says.

Individual TV network owners should also consider working to reposition themselves as “platforms” capable of competing with digital walled gardens — and perhaps even prioritize investments away from advertising, to instead invest in content that will maximize subscriber revenue by making their ad-free offerings as attractive as possible, Weiner concludes.

In other words, despite all the buzz about ad-supported plans, ad-free subscribers may still prove to be an essential element in a profitable streaming model.

Netflix — the original native streaming business — seems to be working from that premise, even as it develops advertising, gaming and other revenue sources.