Advertising has become a monster source of revenue for e-commerce and cloud computing giant Amazon.com (AMZN 0.58%). Ads generated nearly $10.7 billion of revenue for Amazon in the second quarter alone, up 22% year over year. Advertising is now a bigger business than subscription services, which includes Prime, and it's twice as big as Amazon's physical store segment, which is primarily Whole Foods.
Amazon sells advertising services to third-party sellers and vendors aiming to boost sales on the company's e-commerce platform. One area that has remained ad-free so far is the company's Prime Video offering. Included as part of the $14.99 per month Prime subscription, Prime Video offers a streaming alternative to Netflix, HBO Max, and other popular streaming platforms.
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As other streaming platforms embrace advertising, Amazon is following suit. Beginning in early 2024, Prime Video shows and movies will begin including "limited advertisements." Amazon is planning to include fewer ads than other streaming platforms, but going from zero to any number of ads is sure to ruffle some feathers.
Pulling back on the value proposition
Prime members who don't want to see ads in Prime Video shows and movies will have the option to pay an additional monthly fee of $2.99 to retain their ad-free experience. This fee will effectively increase the price of Prime by 20% for those members who choose to pay, and they'll get nothing new in return. While Amazon has said it won't raise the price of Prime in 2024, this new fee is just a price increase in disguise.
To be fair, Amazon does routinely add new perks to its Prime membership. In mid-2022, for example, Amazon partnered with Grubhub to provide Prime members with a free one-year subscription to Grubhub+. But the company has also degraded Prime in other areas.
Earlier this year, Amazon added a layer of fees for Prime members using its Fresh grocery delivery service. Deliveries over $35 were previously free for Prime members. Under the new fee structure, orders below $50 come with a $9.95 fee, orders below $100 come with a $6.95 fee, and orders below $150 come with a $3.95 fee. These new fees make Fresh a much less compelling option compared to alternatives.
The inclusion of ads in Prime Video shows and movies for those unwilling to pay an additional fee on top of their Prime membership fee is yet another case of Amazon looking to extract additional revenue from its Prime members. Many Prime members who don't watch Prime Video often won't care at all, but those who were drawn in by the streaming service may not be happy with the choice they've been given.
Taking a risk
Prime has been a wildly successful service for Amazon. Prime members have grown accustomed to fast shipping, sometimes next-day or even same-day, and there are few alternatives that don't involve visiting a store. The company has expanded its use of ultra-fast shipping, saying that it quadrupled the number of units sent to U.S. Prime members with same-day or next-day shipping so far this year compared with 2019.
But each fee increase, like the change to Amazon Fresh pricing or the additional fee for ad-free Prime Video viewing, risks pushing away Prime members who are on the fence about sticking with Prime. No one likes to pay for something they previously got for free.
Traditional retailers have sped up their own online shipping and invested in pick-up options. Walmart offers free delivery, including groceries, from its stores for Walmart+ members, and Target's Drive Up service is particularly popular. Dropping Prime is easier today than it was in the past for those who want their orders quickly.
As Amazon tries to grow its advertising business by pushing Prime members to either pay more or watch ads, the company will need to be careful to not destroy the customer loyalty it's built up over nearly 20 years of offering Amazon Prime.
