Amazon (AMZN -0.68%) released IMDb Freedive in January, a free ad-supported video-on-demand platform available on and Fire TV devices. Now the company is in talks with both media companies and marketers to offer even more ad-supported video for Fire TV customers, according to a Cheddar report.

Amazon is looking to offer both news and entertainment programming. The company will license content from other media companies, according to the report, but it won't include any original content, such as Amazon Prime Video.

Amazon's plans pose a significant threat to Roku (ROKU -0.81%), which has made significant investments in its Roku Channel since its launch about a year and a half ago. The Roku Channel also offers ad-supported video content, and it recently added premium subscriptions to video-on-demand channels within the app. Amazon is in a better position to win advertising revenue and license better content than Roku, making its devices that much more attractive to consumers.

An Amazon Fire TV Edition television set.

Image source: Amazon

A bigger budget means more and better content

Amazon is already investing billions of dollars in content for Prime Video. It practically has the ability to spend whatever it wants on content for its latest expansion into streaming video.

Roku, on the other hand, has just $198 million in cash and short-term investments sitting on its balance sheet. That's a bit less than the $40.5 billion at Amazon's disposal.

Both Amazon and Roku have a good idea of what its users are interested in watching, so they can use that data to inform their content licensing decisions. Amazon, however, is better at crunching data to make decisions, such as what products to show shoppers or developing private-label products. That means it might have a better understanding of a piece of content's true value, and it might be willing to pay more for it than Roku as a result. And it certainly has the money to do so.

If Amazon's service has more attractive content than the Roku Channel, it could incentivize consumers to buy a Fire TV device. Fire TV is already attractive to Prime members because of Prime Video's integration with the user interface. But Amazon is looking to reach beyond Prime members with its ad-supported service and Fire TV. It could potentially use the devices and ad-supported service as a means of selling consumers on Prime.

Better data means better advertising for everyone

Roku has done an excellent job building out its advertising technology and targeting capabilities, but Amazon has a $10 billion advertising business. Amazon, which already has a couple of video ad products with its Thursday Night Football broadcasts and Twitch videos, has considerable ad technology and ad buyers in place to compete.

Moreover, Amazon has better data to work with than Roku. Amazon knows what its viewers are searching for, strongly considering, and buying online. That's some extremely valuable data for marketers.

Better data also makes ads more relevant to viewers. Cat lovers don't want to see advertisements for dog products, and dog lovers definitely don't want to see ads for cat products.

Not only does Amazon's superior data enable it to monetize its ad-supported video better than Roku, it makes it more attractive to consumers as well.

If Amazon wanted to offer content owners a revenue share in exchange for licensing content, a strategy Roku has taken with the Roku Channel, most would find Amazon's platform more attractive because of its better monetizing capacity.

Is there room for both?

Amazon's plans are to keep its ad-supported streaming content exclusive to Fire TV users, according to Cheddar's report. Roku took a similar approach with the Roku Channel initially, but it has since started branching out to more platforms.

Roku's strategy is shifting from hardware sales to a platform business, where it generates money from advertising and revenue shares from the subscriptions it sells. The latest integration of premium subscriptions in the Roku Channel gives it a greater capacity to extend the service to more devices.

Amazon, meanwhile, is focused on driving growth in Prime memberships. Fire TV (and most of Amazon's other devices) is designed to work better with Prime. The more Amazon can incentivize customers to buy a Fire TV, the more likely they are to sign up for a Prime account. As such, it's unlikely Amazon will extend its ad-supported video service beyond its own devices.

So, if customers want both, they have to hope Roku will work with its biggest competitor. Despite Roku's increasing openness to work with other hardware makers, that's still a long shot. Amazon's ability to invest in content and attract marketers and consumers makes it a serious threat to Roku, and it could force the smaller company to make some very tough decisions.