Prime Video to include ads, boosting revenue and margins
- AMZN will incorporate ads in their streaming services, allowing consumers to avoid ads by paying an additional US$2.99.
- The connected TV (CTV) ad spending market size is projected to reach US$15.56 billion in 2024, growing at a +24% CAGR in FY22-27F.
- Streaming services revenue is estimated to be at US$40 billion in FY23, contributing approximately 8% to the group revenue. This initiative may add US$3-6 billion in additional revenue or 8-15% to the streaming services revenue.
Prime Video movies and TV shows will include ads. Amazon.com, Inc (AMZN) announced that its Prime streaming services will have ads starting January 29 in the U.S., U.K., Germany, and Canada, with other countries planned for later in the year. For an additional US$2.99 per month, Prime members can opt for an ad-free experience. That said, for users who choose the basic Prime Video plan at US$8.99/month, they will need to pay US$10.99/month to watch without ads.
AMZN’s advertising business is growing fast and the new ad plan in prime video could further boost revenue. AMZN’s ad services recorded 2Q23 revenue of US$10.7bn rising by 22% y-o-y, much better than competitors (SNAP’s -4% and META’s +11%) and comprised 8.0% of group revenue. More advertisers are turning to AMZN’s retail media network to deceive Apple’s privacy changes and get closer to shoppers. That explains why AMZN’s ad sales have grown dramatically compared to peers. The new ad plan for AMZN Prime Video could further improve ad revenue in future, AMZN prime video has over 117m subscribers globally. Meanwhile, Netflix revealed their new ad tier plan has nearly 5m monthly active users globally within 6 months of its launch. Netflix Basic with Ads plan cost US$6.99/month in the US which is 20-40% lower than the current starting price (without advertisement) and lower than competitors like Disney+ (US$7.99), Hulu (US$7.99) and ESPN+ (US$ 9.99). Disney raised the prices of its ad-free Disney+ and Hulu plans for the second time to US$13.99 and US$17.99/month, up from US$10.99 and US$14.99/month offering. However, adjusting the pricing structure for Prime Video, which is just one of the many perks bundled with a Prime subscription (including free shipping and various discounts), carries certain risks. This is because, unlike Netflix and Disney, Prime Video is not as central to AMZN’s core business. This change could potentially displease Prime members, as they already subscribe for premium services like free shipping and other associated benefits.
Advertising on Prime holds the potential to add US$3-6 billion in revenue and boost margins. According to eMarketer, overall ad spending on connected TV (CTV) platforms like Prime Video will reach US$15.56 billion by 2024, growing at a 24% CAGR from FY22-27. Streaming services, encompassing Prime Video, Music Unlimited, and Audible, are estimated to reach US$40 billion in revenue in 2023, contributing approximately 8% to AMZN’s group revenue. On the operating income side, streaming services are estimated to contribute 3%. This advertising initiative could potentially add US$3-6 billion to AMZN’s annual revenue and boost margins, contingent upon the volume and effectiveness of the ads. Amazon’s move aligns with an industrywide trend of incorporating advertisements across major streaming services. A key risk associated with this strategy is user churn to other streaming platforms, but we perceive this as unlikely. For instance, when Netflix introduced its ad-supported tier at US$6.99/month and implemented measures against password sharing, the ad tier resulted in higher-than-expected subscriber growth in Q3 2023, with approximately 30% of new members in launch markets opting for it. By November 2023, Netflix’s ad tier had amassed 15 million subscribers, tripling the initial estimates.
Figure 1: Streaming platform price comparison, with ads and no ads
| With Ads (US$) | With no Ads (US$) | |
| AMC+ | 4.99 | 8.99 |
| Apple TV+ | 9.99 | |
| Discovery+ | 8.99 | |
| Disney+ | 7.99 | 13.99 |
| Hulu | 7.99 | 17.99 |
| ESPN+ | 10.99 | |
| Max | 9.99 | 15.99 – 19.99 |
| Netflix | 6.99 | 15.49 – 22.99 |
| Paramount+ Essential | 5.99 | |
| Peacock Premium | 5.99 | 11.99 |
| Amazon Prime | 8.99 | 10.99 |
Source: Seeking Alpha