Amazon (NASDAQ:AMZN) has quickly built a sizable digital-video advertising business on the back of its Fire TV platform. Now, Amazon's eyeing the audience outside of its 40 million Fire TV users.

The online retail giant is in talks with multiple publishers to sell some of their ad inventories on other streaming platforms through its demand-side platform, according to a report from the Wall Street Journal. The move would enable Amazon's marketers to reach broader audiences while still using its valuable data to target and measure their ads.

An Amazon Fire TV mounted on a living room wall.

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Aggressively going after the connected-TV market

Amazon has been aggressive in its efforts to grab more ad inventory from publishers. In late 2018, it started requiring most ad-supported streaming services on Fire TV to provide a percentage of ad inventory in exchange for distribution. That led to a standoff between Amazon and Disney (NYSE:DIS) ahead of the Disney+ launch, as Amazon took the opportunity to renegotiate its contracts for Hulu and ESPN+.

The latest move to work with publishers to fill ad inventory on platforms outside of Fire TV is the next step in Amazon's evolution from a mere distribution platform to a digital advertising platform. It also puts it head-to-head with Roku (NASDAQ:ROKU) and its recent acquisition of Dataxu. (Amazon dropped support for Dataxu on Fire TV late last year.)

Amazon has good reason for being aggressive with publishers. First of all, its user base on Fire TV has grown quickly, reaching 40 million active accounts globally at the start of 2020. That's more than Roku's 32.3 million accounts at the end of September. Moreover, the spend on connected-TV advertisements is growing rapidly, and Amazon is making a play for anything it can get its hands on as dollars flood into the market.

Amazon needs to expand beyond Fire TV

If Amazon wants to become a major force in connected TV advertising, it needs to expand its advertising inventory. User growth on the Fire TV platform notably slowed at the end of 2019, while its biggest rival Roku saw growth remain relatively steady. So Amazon can't count on the continued expansion of its user base to fuel growth in its connected-TV advertising business.

Amazon's video-ad business remains relatively small compared to its search-advertising business on its website. That's likely to remain the case for some time, as several factors continue to push merchants and marketers to spend more on Amazon's sponsored search ads

Amazon's pitch to publishers is that it can fill ad inventory at higher average prices compared to the competition. That's likely based on high demand on its homegrown demand-side platform, although Amazon would also work with other digital service providers to fill inventory. 

Over time, however, Amazon should be able to increase demand on its own platform due to the broader audience it has available. That could enable outsize growth for Amazon's digital-video ad business as it sees average ad prices climb on both Fire TV and external ad inventory due to higher demand. That would produce a virtuous cycle for Amazon, as higher average ad prices makes it a more attractive partner for publishers, opening up more opportunities to fill inventory.

Amazon's certainly an attractive advertising partner for publishers, but some may be wary of ceding control of their ad inventories to the company since it's also a big distribution platform. The move could give Amazon greater leverage in negotiations leading to more standoffs like the one with Disney. That's a small challenge for Amazon to overcome as it aims to grow its share of the expanding connected-TV advertising market.

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