Amazon already has a colossal ads business and will extend it to Prime Video in January

E-tail giant seeks profitability for its vid-streaming service and a classic Big Tech dominance play

Analysis Amazon.com has emailed subscribers to its Prime Video service, in America at least, to advise them ads will start to appear in their movie and TV streams as of January 29 – unless they pay more.

Prime Video is one of several services bundled into Amazon Prime, the e-tail giant’s loyalty scheme that includes free delivery on many items, streamed music, free access to some e-books, and discounts on certain products. The service costs $14.99 a month for customers in the USA.

Amazon has offered streamed video since the mid-2000s under various brands but launched Prime Video in 2016 and started to create its own content for the service. Amazon offered the service as a standalone offering for some time, in direct competition with the likes of Netflix, but later made it a part of its overall Prime offering.

Prime Video has done well since, producing plenty of shows that won critical acclaim and substantial audiences, without quite creating the kind of zeitgeist-defining shows like Netflix’s Stranger Things or HBO’s Succession. That wasn’t for lack of trying: Amazon is thought to spend $7 billion a year on content for Prime Video, and to have spent at least $200 million just for the rights to make shows based on Lord of The Rings.

In July 2023, Amazon CEO Andy Jassy reportedly visited Amazon Studios, the web giant's Hollywood-based content arm, to learn more about its operations and whether they represent value for money.

Not long afterwards, in September 2023, Amazon announced it would include ads in Prime Video, but also introduce a $2.99/month ad-free option.

In the past few days, Prime subscribers have received emails advising that ads will start on January 29, 2024. As you might imagine, a good number of netizens went ballistic.

Amazon has not described how ads will intrude into streamed programming, other than to say it intends to show “meaningfully fewer ads than linear TV and other streaming TV providers.”

Why add ads?

When streaming video rose to prominence, the absence of ads was a big selling point and a pleasing contrast to cable television services that charged for content but also inserted ads.

But streaming at global scale isn’t cheap, and as more players entered the market subscriber numbers stalled or even waned. For the likes of publicly traded Netflix, that meant investors wanted to see new sources of revenue. One came from a crackdown on sharing passwords, which in theory encouraged more subscriptions. Including advertising in its cheapest plans was another.

Amazon’s decision to add ads also appears to flow from the profit motive, which we know because on the e-tail giant’s Q3 2023 earnings call Andy Jassy made the following observations:

We're pleased with what we're seeing in Prime Video. Prime Video continues to be an integral part of the Prime value proposition, where it's often one of the top two drivers of customers signing up for Prime. We also have increasing conviction that Prime Video can be a large and profitable business in its own right as we continue to invest in compelling exclusive content …

The Register fancies that quote suggests Prime Video is not profitable today, and that while it’s an on-ramp to other Amazon services it’s not paying its way as a fries-with-that proposition alone.

Ads therefore have the potential to help Prime Video produce a profit.

Ads are also a business Amazon understands very well. In Q3 2023 the company’s ads services biz generated $12 billion revenue – almost $2 billion more than its subscription services (but $11 billion less than AWS).

No wonder ads for Prime are on the agenda. Especially as most of the ads Amazon currently sells are online. If the company can convince those who advertise with it online to spend on video ads too, it will secure more of their marketing spend at the expense of its digital rivals Google, Microsoft, and Meta.

And also at the expense of cable and free-to-air broadcasters, which are already struggling with declining audiences and revenue.

And if those broadcasters weaken further, Prime Video may become more compelling even if Amazon is able to spend less on content because it has less competition. That’s bad news for organizations like sporting leagues that have come to expect ever-increasing rights payments.

Ads coming to Prime Video is therefore more than an irritant to subscribers. It’s a potential harbinger of big change in how we all consume and pay for entertainment, with Big Tech in the box seat.

But Amazon’s decision also shows Big Tech can’t set all the rules, because it’s hard to commoditize creativity.

Amazon is famously ruthless about lowering costs through automation. Filmmakers know they need to work within budgets, but chafe if the amount of cash on offer stymies their creative ambitions. Introducing ads while continuing to pursue original content suggests Amazon understands Prime Video is not a service it can operate in its usual mode. ®