January 15, 2019

Amazon Flexes its Advertising Muscle with New Streaming Service

More than a year ago, TDG predicted that Amazon would be launching a free ad-supported streaming service, so the news from this past week that its IMDB division launched Freedive should come as no surprise to frequent readers.

But what are the competitive advantages driving Amazon to follow this path?

About the New Service
Amazon’s new free video on-demand (FVOD) streaming service features dozens of catalog movies, including titles such as Legends of the Fall, True Romance, Adaptation, and Panic Room, as well as TV shows and IMDB short-form originals. Freedive is also differentiated by its use of IMDB’s rankings to help people find what to watch. Initially the service will only be available in the U.S and distribution will be limited to Amazon website and Amazon Fire TV devices.

Why It Matters
While Freedive will help Amazon compete in the direct-to-consumer streaming space, its real value lies in allowing its advertisers to leverage Amazon’s first-party purchase data and advanced targeting capabilities. The streaming service better positions the company to capture a larger share of the highly lucrative TV ad market going forward.

As TVREV co-founder and former TDG analyst, Alan Wolk, recently noted, “Facebook knows who you want to be, but Amazon knows who you really are,” thus enabling advertisers to directly tie purchase data from the world’s largest online store back to ads and creating an ad platform that is without peer.

Even before its FVOD announcement, Amazon had already surpassed both Microsoft and Verizon’s Oath to become the third largest digital advertising company in the US, increasing its ad market share at expense of Google and Facebook. The company’s new ad-based streaming video service is further evidence of its ambitions to dominate the ad market.

Path to Profitability
Since its inception, Amazon has taken a long-term view that was focused on sacrificing profit for growth and market share. Over the long run, the advertising business is one clear path to improving profitability since it is a business that would allow Amazon to leverage its massive audience. According to Jay Kahn, a partner at Light Street Capital, “advertising is the most profitable business in the world,” and for Amazon “it is going to be more profitable than its cloud business.” Other analysts are estimating that Amazon’s ad divisions has a fat profit margin as high as 75 percent.

Going forward, analysts expect that Amazon’s momentum in the ad business to continue since more and more people now start their product-related searches on their platform.  A recent survey conducted in March found that 54% of consumers visit Amazon first when looking for a product online, outpacing the 15% who turn to Google first.  This behavioral shift is significant, since it leads directly to an increase in search traffic revenue while taking share directly from Google.

Conclusion
While Amazon is still committed to scaling its core Prime subscription business, it is likely that its future growth and profitability will be driven by its advertising business.  The ad business still has ample head room for growth but ultimately there is a limit to how many ads you can push in front of your customers before  your site becomes fully saturated and affects the user experience.

Amazon’s growing ad business will not top Google’s any time soon, but it will continue gain market share in the digital ad space and to grow at the expense of traditional TV media and physical retailers.

Brad Schlachter is a Senior Advisor for TDG and a highly accomplished digital marketer and advisor for leading entertainment and technology focused organizations. Prior to TDG, Brad served as the marketing lead for Motor Trend OnDemand, the premier OTT destination for gearheads, and was the VP of marketing at Hallmark Labs for the launch of its family-friendly SVOD service. He currently lives in Los Angeles.

 

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