Amazon (NASDAQ:AMZN) is planning something big: a new video streaming service.

Of course, Amazon already has a significant presence in the streaming world. It's a player in the subscription video on demand (SVOD) space, where it offers a streaming library rolled into its Amazon Prime service. Amazon users can also rent and buy titles on Amazon, and the company even has a hub-type system for offering subscriptions from third-party streaming services ("Amazon Channels").

Amazon's new streaming service is an AVOD service

Image Source: Getty Images

So what's different about the new service? This time, Amazon is getting into the ad-supported video on demand (AVOD) space. In other words, Amazon's new service is free to viewers.

Understanding AVOD

To understand what Amazon is actually trying to accomplish by introducing a separate new streaming service, we have to understand the AVOD business space.

The AVOD game isn't new: Sony (NYSE:SONY) has been in the space since its 2006 acquisition of Sony Crackle (then called "Grouper") for $65 million, and current top dog Tubi TV broke into the market in 2014.

From the start, AVOD services have been seen largely as supplementary to SVOD services. Tubi TV and Sony Crackle do not compete directly with Netflix so much as offer users an alternative when they can't find what they're looking for on Netflix. The nature of AVOD, in which ad revenues scale with streaming hours, makes this trickle-down model viable -- especially, AVOD promoters argue, as SVOD services turn increasingly to original content and leave major-studio films and TV shows to AVOD services.

Amazon is a big company, and its entry into the AVOD space is certainly going to get the attention of the folks at Tubi TV and Sony Crackle. However, it's also important to note that Amazon's new service is a little different from that of those major AVOD players. The key is platform support: while Tubi TV and Sony Crackle are both independent services that reach users on a wide range of platforms, Amazon's new service appears to be planned as a Fire TV exclusive.

That's still not exactly good news for the big AVOD players. Fire TV does, after all, have a huge market share among streaming platforms.

Streaming Platform Market Share
Roku (NASDAQ:ROKU) 37%
Fire TV 28%
Apple TV 15%
Chromecast 14%

Data source: Fortune

Nevertheless, the bright side for Tubi TV and Sony Crackle is that, at least for now, Amazon's priority is not to dominate the AVOD space: it's to promote its Fire TV devices and fire back at Roku.

Amazon Free Dive vs. The Roku Channel

Amazon's platform-exclusive model is very different from the one pioneered by Sony Crackle. However, Amazon Free Dive is remarkably similar to a service that was recently released by Amazon's streaming platform competitor, Roku.

Roku has a platform-exclusive AVOD service of its own. The Roku Channel ("channels" are Roku's branded term for apps) offers free streaming of licensed content to Roku users. As with Amazon's new service, there seems to be a dual appeal: Roku is certainly adding a revenue stream in the form of its AVOD service's advertising sales, but it is also adding a differentiator for its streaming platform and devices.

Amazon's new service may matter in the AVOD space in general, but its more immediate impact will be to offset the Roku Channel in Roku and Amazon's ongoing war for streaming platform market share.

Platform-specific services and the future of AVOD

Tubi TV and Sony Crackle have broad platform support, making them more appealing than Roku and Amazon's platform-specific options. But all parties concerned -- AVOD and platform companies alike -- are going to feel the impact of Roku and Amazon's AVOD spat. Roku and Amazon have a combined market share of 65%. They now have their own AVOD services and will be incentivized to steer users to those services. Amazon's Fire TV platform has long surfaced Amazon content; Roku's platform is comparatively app-agnostic, but has nevertheless made a point of promoting The Roku Channel.

Amazon and Roku are both making a push for users as the holiday season looms. Regardless of which better, it seems likely that their combined market share will only grow relative to the weaker Apple TV, Chromecast, and Android TV entrants.

That could depress income for Tubi TV and Sony Crackle, since a significant portion of those services' user bases access the services via Roku and Fire TV devices.

Does Amazon Free Dive really matter?

The streaming market is massive, but it's also relatively new. It's a market in which a platform and SVOD company like Amazon can suddenly try to get into the AVOD market, too. Given Amazon's massive size and its positioning, it's a market in which such an idea just might work.

Amazon's Free Dive matters, but its impact is going to be spread across different markets. This is about Roku, not Tubi TV or Sony Crackle. What investors really need to watch will be holiday sales figures for Roku and Amazon. If Amazon Free Dive matters in the way that Amazon actually it to, we'll see the results reflected market share growth for Amazon Fire TV.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.