24/7 Wall St. Insights

• Amazon.com Inc. (NASDAQ: AMZN) reportedly has started undercutting Netflix Inc. (NASDAQ: NFLX) ad rates to gain market share.
• Because of its revenue from other sources, Amazon does not have to make much money on Prime Video for now.
• Also: 2 Dividend Legends to Hold Forever

Subscriptions, some of which include advertising, have been a huge success for Netflix Inc. (NASDAQ: NFLX). When it announced its most recent earnings, management wrote:

Ads fulfill two important strategic priorities for Netflix: first they enable us to offer lower prices to consumers; and second, they create an additional revenue and profit stream for the business. Just over 18 months since launch, we continue to scale our ads tier, which now accounts for over 45% of all signups in our ads markets.

The Amazon.com Inc. (NASDAQ: AMZN) Prime Video business means to take a large piece of ad-supported streaming media business for itself. If the Amazon game plan works, Netflix will not be able to use advertising quite as well to boost earnings.

According to the Financial Times, Amazon has started undercutting Netflix’s ad rates to gain market share in the ad-supported streaming sector. An analysis shows that Amazon has been able to cut rates because it has a huge amount of inventory. It is better to get something for that inventory, even at discounts, than to get nothing at all.

The Amazon Advantage

The ad-supported version of Amazon Prime Video costs $8.99 a month, while the ad-free version is $11.98. When Prime Video is part of the larger Prime bundle, which includes services like free shipping, the monthly price is $14.99. The company is almost certainly making money on the lowest-priced “video with ads” since its expenses for the service are spread across all tiers.

One reason Amazon has so much ad inventory is a strategic move by the e-commerce and cloud company. The Financial Times reports, “The ecommerce giant automatically converted all its more than 200mn total global subscribers to the ad tier — unless they actively chose to pay more for the premium ad-free service.”

The company makes a great deal of money on advertising. In its most recent quarter, the figure was almost $10 billion. Much of this is for ads that run on e-commerce pages, so not all come from Amazon Prime.

Amazon has one other huge advantage over Netflix. Because of its revenue from other sources, it does not have to make much money on Prime Video for now. Its other huge revenue engines let it play the ad price game long term. Netflix does not have that luxury.

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