Amazon is all in on advertising

Photo of Alistair Taylor
by Alistair Taylor

Amazon’s latest play into the TV ad market with the launch of Free Dive, an ad-supported video service for Fire TV users, showcases the company’s intent to further diversify revenue streams from its video services, pushing into advertising video on demand (AVOD).

This latest effort to generate more revenue through advertising comes off the back of a successful quarter for Amazon’s growing advertising business. Although Amazon does not disclose advertising revenues, CFO Brian Olsavsky announced that it accounts for the majority of ‘other revenue’, which last quarter saw a 132.2% increase year-on-year (YoY) to $2.2 billion in Q2 2018. Although Amazon’s foray into advertising is nascent, with Amazon Marketing Services only launched in 2012, its growth rate is something the other tech majors now need to take note of. Rival tech majors Facebook and Alphabet only achieved YoY growth rates of 42.2% and 24% respectively.

Other revenues (of which the majority is advertising) now account for 4% of Amazon’s total revenue, up from 2% in Q2 2017. While Amazon’s advertising revenue is a fraction of what Facebook and Alphabet generated in Q2, Amazon has started to eat into the other tech majors’ market share, growing two percentage points YoY to 5% in Q2 2018 (MIDiA Research Tech Majors Market Share Q2 2018 Report). This AVOD service is amongst a growing list of moves Amazon is making to acquire a larger share of the $59.2 billion US TV ad market (Source MIDiA Research Video Model. Coupled with the consumer data Amazon boasts through its thriving core ecommerce business, it will enable Amazon to become a greater force in the overall advertising game in the near term.

What is Free Dive? 

An alternative to Amazon Prime Video, the service, which is intended for Fire TV customers, is reportedly being developed by the Internet Movie Database (IMDB), which Amazon acquired back in Q2 1998. According to The Information, Amazon is in talks with major TV studios about licensing older programming, that have previously aired on TV networks, on Free Dive.

The Free Dive value proposition is similar to what Roku rolled out with its own ad-supported service,The Roku Channel, which airs old films such as Bad Boys and TV classics like 3rd Rock from the Sun. Off the back of this ad-supported service, Roku saw platform revenue increase 96% YoY in Q2 2018, driven primarily through advertising. Roku also announced in its Q2 earnings release that ARPU increased by 48% YoY to an all-time high of $16.6. In the same release Roku went onto state:

“We’ve doubled ARPU over the last two years, driven primarily by advertising, with the majority of ad revenue coming from video ads we service on ad-supported channels, and we also continue to see strong audience development and brand sponsorship ad growth.”

Roku is Amazon’s Fire TV’s biggest competitor in the streaming device market. As such, having seen how ad-supported channels can impact company financials, Roku will be concerned to see how Amazon’s Free Dive fares, by employing a similar ad-supported strategy. Amazon could potentially steal away not only consumers, but also entice the major advertisers away from TV networks, something that Alphabet’s YouTube and Facebook have struggled to do thus far.

This advertising effort follows Amazon’s introduction of ad-supported video onto IMDB, the introduction of ads onto Twitch Prime free subscriptions (but not the Twitch paid subscription service called Turbo) and the running of adverts on its Prime Video sports content, namely NFL Thursday Night Football. Expect the implementation of adverts into sports content on Prime Video in Europe to follow, as Amazon’s strategic investments into sporting rights continues to rise.

According to Reuters, Amazon charged advertisers $2.8 million for 30-second spots during NFL games on Amazon last year, which granted them access to run ads across during the season. Sports content offers Amazon a higher margin opportunity than its current core retail operations, to expand its video advertising business. Leveraging Amazon’s targeting capabilities by providing more video content on its platforms to advertisers will not only increase its revenue, but also aid in capturing more of the advertising market share away from the competing tech majors.

Can AVOD bridge the gap?

Amazon clearly sees potential to substantially increase revenues through launching an AVOD service, capturing more of the advertising market away from its rival tech majors, but it still has a long way to go to bridge the gap, considering Alphabet and Facebook’s combined advertising revenue was 18.7 times more than Amazon generated in Q2 2018. However, do not underestimate the ability of multi-platform Amazon to rapidly close this gap going forwards.

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