Amazon (AMZN +0.18%) Prime subscribers have likely already read the email telling you the news. That is, unless you're willing to pay an extra $2.99 per month, you'll soon be seeing advertisements during Prime's streaming programming. You may have even grumbled about the change or considered canceling your service. Certainly, plenty of other Prime subscribers have.
If you're an Amazon shareholder, though, the controversial decision is actually something to celebrate. Some Prime members may end up canceling, but there's more upside than downside to the move.
The time is right
Last Wednesday's email to Prime's members was short and straight to the point. Amazon explains:
"We are writing to you today about an upcoming change to your Prime Video experience. Starting January 29, Prime Video movies and TV shows will include limited advertisements. This will allow us to continue investing in compelling content and keep increasing that investment over a long period of time. We aim to have meaningfully fewer ads than linear TV and other streaming TV providers. No action is required from you, and there is no change to the current price of your Prime membership. We will also offer a new ad-free option for an additional $2.99 per month that you can sign up for here."
The decision -- and its timing -- is brilliant for a couple of reasons. The first of these is simply that Amazon is making the move from a position of strength. The streaming industry isn't just reaching its inevitable maturity. It's facing something of an existential crisis. Most of these services are not yet big enough to be profitable; as it stands right now, many may never actually become big enough to do so.
Numbers from TV-ratings agency Nielsen tell the tale, indicating that growth in total viewing time of streaming services within the U.S. is slowing. Meanwhile, cable is still losing ground, but at a slower pace, and much of this loss can be chalked up to cord-cutting rather than waning interest. Even long-beleaguered broadcast television is finally starting to hold its ground, with the usage of aerial antennas expanding.
Data source: Nielsen. Chart by author. "Other Non-Streaming" predominantly reflects video gaming.
And this headwind is rather indiscriminate. Take streaming powerhouse Netflix, for instance. It's still a viewership leader within the U.S. market, but it hasn't captured any new view-time share for over a year now. Things are even more alarming for the venerable Walt Disney. The total share of view time reported for Disney+ has been stagnant since 2022, while Hulu's share of domestic view time fell to a multi-year low in November.
There are two exceptions to this bigger trend, however. One is Alphabet's YouTube, which continues to draw a growing crowd to its unique, free-to-watch, ad-supported video platform. And the other exception? You guessed it -- Amazon Prime. Nielsen says its piece of domestic TV view time is still making slow and steady progress in contrast to most of its competitors.
Data source: Nielsen. Chart by author.
Connect the dots. Whatever Amazon is doing with streaming, it's working. Right now is likely its best chance to rip off the proverbial band-aid while people are still showing growing interest in its content library.
The other reason Amazon's decision makes sense right now? With the exception of Apple's relatively small-scale streaming business, every other major streaming service has already forced customers to choose between higher prices for ad-free services and lower-cost services with advertisements. Amazon is hardly breaking new ground.
Indeed, not only do consumers now expect it, many of them are embracing the trade-off. Data from Hub Research indicates that six out of 10 U.S. consumers don't mind advertisements if they lower the monthly cost of the streaming service in question by $4 to $5.
Amazon's net win(s)
Still, Amazon will lose at least some Prime subscribers in the immediate future. Will it be worth it? In a word, yes. Amazon's biggest win from this move is keeping people signed up for Prime itself. Although the number can vary, on balance, Prime subscribers spend two to three times as much per year shopping online at Amazon.com as non-Prime members do.
Given Consumer Intelligence Research Partners' estimate that 71% of U.S. residents have access to Prime's benefits , it's crucial that the company finds a way to keep them on board. Some won't stay, but most will likely tolerate ads in exchange for continued access to free one-day shipping on most goods sold at Amazon.com.
And the other win? As the company noted, the introduction of ads into Prime's streaming feeds will offset the growing costs of operating the service.
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Key Data Points
We don't know whether Prime's video service is profitable as a stand-alone operation; it's been used as a loss leader for most of its existence anyway. But given that Walt Disney's streaming services, Paramount's Paramount+, and Comcast's Peacock are all still in the red while Warner Bros. Discovery Max is only marginally profitable, it's not a stretch to suggest Prime is on the bubble, at best.
Even if its intended primary purpose going forward is to keep consumers signed up for Prime, it can't simply tread water -- or even bleed money -- indefinitely. Something's got to give sooner or later. The company's just making sure it doesn't spend its way into a more difficult situation if it can be avoided.
The other expense Amazon's likely trying to offset? Its burgeoning logistics expenses stemming from greater usage of Prime's shipping perks. Thanks to a combination of inflation and growing usage of Prime's fast-shipping features, the third quarter's expenditures on shipping and fulfillment hit $22.3 billion. That's twice as much as the company was spending prior to the COVID-19 pandemic.
Revenue has doubled during that time, too, to be fair. As a company's business scales up, however, operating costs shouldn't scale up quite as much. The new $2.99 fee could add roughly $5 billion worth of additional yearly revenue. For perspective, Amazon's expected to generate a little over $500 billion in revenue this year and will likely turn a little more than $20 billion of that into income.
Bolstering the bullish argument
It's an interesting test, to be sure. While Amazon has raised the monthly price of Prime before with only modest pushback, an ad-supported version is new. It could be perceived as un-Amazon-like, undermining its status and stature as a premium service provider.
On balance, though, consumers' views of Amazon are already less about form and more about function. Most of Prime's video users won't care too much about the occasional commercial break, and those who might care likely won't mind ponying up another $3 per month. It's still an incredibly cost-effective way to shop online.
More important to current and prospective shareholders, launching an ad-supported tier of Prime while raising the price of the ad-free tier isn't a bearish development. If anything, it bolsters the bullish argument.
