The e-commerce giant’s web is about to expand a bit more.
investors are watching Amazon (AMZN 0.58%) You probably already know that the company is waist-deep in the advertising business. In 2023, it collected a total of $47 billion from third-party sellers who wanted to more prominently feature their products on Amazon.com. This is a $10 billion improvement over 2022 performance and nearly a tenth of last year’s top line. not bad.
But as growth in this particular business finally begins to slow, the e-commerce giant is firing up another growth engine. It’s still an advertising business. However, this time the medium is video. A few experts believe the TV commercial market is worth $3 billion to Amazon, but this prediction may be an underestimate of what will actually happen.
Amazon moves deeper into the advertising pool
you read that correctly. Amazon is now getting into the TV advertising game. In January, the company finally added ad-supported slots to its Prime streaming service. Prime members who want to avoid these video ads will have to pay an additional $2.99 per month.
It wasn’t a shocking move at the time. With the cost of content increasing faster than consumers’ budgets, most other streaming services now offer ad-subsidized options.
what teeth But what’s shocking is how seriously the company takes this business. Just last week, Amazon made its first appearance on this year’s so-called “Upfront.” Walt Disney NBCUniversal then promotes and hopefully sells TV commercial time to advertisers. Of course, streaming video ads are increasingly replacing commercials aired on traditional cable platforms. Still, the company’s presence at the event drew attention.
But how much of this ad revenue does Amazon get? It depends on who you ask. Market research firm Omdia believes Prime Video will do $2 billion worth of advertising business this year. Analysts at TD Cowen expect the figure to be $3 billion.
However, both projections likely underestimate what will actually happen given the past and future growth of the ad-supported streaming market.
AVOD is now completely mainstream
You may have been a cable TV customer at one point, but statistically speaking, you are no longer. Leichtman Research Group data, similar to eMarketer numbers, suggests that less than half of all U.S. households still pay for linear cable TV service.
where are they going? It’s not difficult to guess. These people are replacing cable with a collection of streaming services, including: Netflix, Disney+, and the aforementioned Amazon Prime. Consumer technology market research firm Parks Associates shows that the average American household currently pays an average of 5.6% for streaming services.
However, not all of these services are ad-free. In fact, most of them aren’t. Parks added that half of U.S. households now regularly use ad-supported streaming services, reflecting efforts to cover the ever-increasing cost of streaming subscriptions. This number will continue to grow as these platforms improve and household budgets tighten.
Of course, advertisers follow the crowd wherever it goes. The global ad-supported video-on-demand (AVOD) market is expected to more than double in size between last year and 2030, with a value of $71 billion, according to Coherent Market Insights. This is why. North America is still her top AVOD market in the world and should account for her nearly 40% of this business.
Considering Nielsen figures showing Prime is the second most-watched ad-supported streaming service in the U.S. (second only to Netflix), Prime’s 115 million U.S. customers give Amazon a significant It is no exaggeration to suggest that the ad-supported video market remains well-positioned to gain market share.A similar situation applies outside the US
The kicker: Amazon can provide advertisers with a treasure trove of digital data about the people who watch Prime programming, allowing them to advertise much more effectively than they can on traditional cable TV.
Indirectly bullish on Amazon stock
Considering the size of the domestic and global ad-supported video market, $3 billion worth of additional advertising revenue seems pessimistic. In fact, I don’t think Amazon would want to do so unless it was certain that it could make significantly more than $3 billion a year by sneaking into the TV commercial space.
But for the sake of argument, let’s say TD Cowen’s numbers are on target. Still, there are clear additional financial benefits to Amazon’s move into this new business. It’s about retaining the company’s top e-commerce customers. Prime members are estimated to spend about twice as much on Amazon.com as non-Prime shoppers. Even if it doesn’t generate additional ad revenue, making Prime members more affordable to retain will be a smart investment for Amazon.
But the company will get at least some revenue from Prime’s early advertising business. So, connect the dots. The case for owning Amazon stock was already pretty good. Well, things got a little better.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. James Brumley has no position in any stocks mentioned. The Motley Fool has positions in and recommends Amazon, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.
