Amazon's ad tier: a step further towards a sprawling ad monetization system

Symbolically, until 2021, there was no line reporting advertising revenues in Amazon's financial publications; by 2022, the $38 billion captured by Amazon Ad services nevertheless represented over 4% of total brand advertising spend worldwide, and this weight could rise above the 5% threshold by 2024. After riding the waves of retail media and streaming, Amazon is now looking to supplement its Prime Video revenues with advertising. Beyond Amazon, the shift of all SVOD pioneers to ad-supported hybrid video on demand progresses rapidly. The Amazon group has been discreet for years about its performance in the advertising field although this revenue stream already accounted for a significant part of the group's resources. Today, Amazon’s advertising revenues see their weight growing within the e-commerce group’s total income, reaching almost 8% of total revenues at Q2 2023 and between 10 and 12 billion dollars per quarter in the last year.

Streaming positioned to foster the growth of advertising revenues

Two sources in streaming will already contribute to the growth of advertising revenues, until Prime Video's ad-tier is put in place: The first one is revenues from free streaming platforms Freevee and Fire TV Channels. Beyond the rebranding in spring 2022, Freevee (ex-IMDB TV) changed its positioning in the three markets where it is currently deployed: USA, UK and Germany. From being a publisher focused on rights held by Amazon, it established itself in the aggregation of third-party AVOD and FAST services: over 300 channels in the US, nearly a hundred in the UK, around 50 in Germany. In the spring, Amazon reorganized the range of free streaming services available in the Fire TV environment, creating a unified platform, Fire TV Channels, which now includes over 400 channels. It is currently only available in the US. The second source of advertising revenues comes from the Fire TV platform, with an installed base of devices that crossed the 200 million mark worldwide in spring 2023. Following the example of other TVOS such as Tizen or webOS, this installed base enables the marketing of advertising space, that can include home screen banners, application launcher thumbnails, privileged locations in the application store or in electronic program guides, in addition to the fee collected from subscriptions to paid services in the Fire TV environment. As noted by NPA Conseil, the extension of the contractual conditions that already governed US Amazon's relations will open up a new monetization lever: since September 1, publishers exceeding an average of 30,000 streamed hours per month (50,000 in the US) must provide Amazon with 30% of their advertising inventory. Amazon retains 100% of the sales generated by this space. Ultimately, whether fully integrated into an Amazon aggregation platform (Freevee, Fire TV Channels) or simply distributed within the group's technical environment (Fire TV), third-party publishers are required to share their revenues with the group. Growth will also come from applying this approach to new territories. The group intends to roll out a bouquet of several hundred free-to-air channels across Europe. In France, for example, it is negotiating with France Télévisions and ARTE.

A potential ad-supported subscriber base of nearly 180 million by 2024

The 9 territories selected for the launch of advertising in 2024 on Prime Video, Germany, Canada, the US, and later this year the UK, followed by Australia, Spain, France, Italy and Mexico count in total nearly 160 million subscribers, 180 million counting the 22 million from the service in India where Amazon launched a tier with ads in June.
As a comparison, the 12 countries in which Netflix's ad-supported offer is currently available represent a potential audience of around 170 million subscribers. The 12 territories in which Disney will be monetizing the Disney+ audience from November 1 total 120 million (including 40 million Hotstar India subscribers in South Asia). For Amazon, as for its competitors, the take-up rate for new packages will be decisive in determining its real weight in the advertising market. Dataxis figures show that the mid-2023 conversion rate can be put at just over 3% for Netflix (12 countries), and 5% for Disney+ (in the USA only, at that date). Three factors could facilitate the rise of Amazon's addressable pool. First, unlike other streamers which created a specific offer, Prime Video doesn’t provide the ad-tier as a choice to its subscribers, as they will all switch to the new offer and will only be able to opt out of advertising by modifying their subscription and paying an additional fee (set at $2.99 per month in the US). Besides, since they also have access to other Amazon Prime services, Prime Video users are already accustomed to advertising when browsing the e-commerce website. Finally, the implementation and marketing will be supported by experienced teams and a proven technical infrastructure.

Hybrid VOD as the new standard?

In the end, Disney+, Amazon Prime Video and Netflix will eventually all have an ad-tier option in Western Europe (Germany, France, UK, Italy, Spain) and North America (Canada, USA). But they will not be direct competitors to capture advertising spending in all countries at first. Although less established than Netflix in Nordic European Countries, Disney+ will offer its ad option to customers from November. Nordic European countries have historically not been ad-oriented audiences. In Asia, Amazon chose not to address its large Japanese market (11 million subscribers), leaving these ad opportunities to Netflix for now, but plans to build commercial relationships with advertisers in Australia. Disney+ hasn’t projected to expand its offers in Asia yet, although it is an audience already accustomed to ad-supported video services. It would have to make its way in an already cluttered market with well-established brands. Besides Disney+ might be reconsidering its presence in the region as it is presumably in talks to sell its Disney+ Hotstar asset to the local operator Reliance Industries. However, despite the initial choices made for the launch strategy, and as confirmed recently by Paramount+ Group CEO Bob Bakish in July, these services’ objectives will most likely lie in a continuous expansion of the ad-supported offers to more international markets. The arrival of advertising on Amazon could further popularize the acronym that emerged to describe subscription services that have integrated advertising into their business model and are now referred to as hybrid video-on-demand services. Apple TV+ is now the only one of the American SVOD platforms not to offer an ad tier, as the option can already be found on Discovery+, Disney+, Hulu, Max, Netflix, Paramount+, Peacock, and now Prime Video. The generalization of advertising on pay platforms seems well underway.
Sa Eva Nébié | Head of Research at Dataxis
Philippe Bailly | President at NPA Conseil
This research highlight was written in collaboration with NPA Conseil. It is based on our data coverage of OTT and Video worldwide. Please contact us to get a demo and see the depth of our service. Discover our conference Nextv Series Mexico (co-located with Next Giga Connect Latam), the event that revolves around innovation and transformation of the main players in the new streaming industry around the country.

Published on: Thursday, 28 September, 2023

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