In a recent report, Morgan Stanley analysts projected that Amazon’s introduction of an ad-supported tier for Prime Video could bring in an estimated $4.8 billion in yearly revenue by 2025. The move is seen as a strategic step for Amazon to expand its advertising business and capitalize on the growing demand for streaming services.

While the details of the ad-supported tier are still uncertain, one possibility being considered is offering ads to all Prime Video members and providing an option for an ad-free experience at a higher price. The analysts based their projections on several factors. They estimated that there would be approximately 73 million Prime Video viewers in 2025, assuming that around 77% of Prime subscribers would use the streaming service.

The analysts also considered the average viewing time per user, which they set at 45 minutes per day, taking into account factors such as non-incremental ad opportunities during sports content and potential viewer time erosion due to the introduction of ads.

To determine the ad load, the analysts looked at comparable platforms like Netflix and Disney, which currently have around four minutes of ads per hour. They also considered the pricing of ads, using premium video cost per thousand impressions (CPM) as a reference. While US YouTube ads are priced in the mid-$40 range, the analysts conservatively estimated a $30 CPM for Amazon’s ad-supported tier, considering the need for Amazon to refine its ad product and prove its value to advertisers.

The potential profitability of the ad-supported tier was also a focal point. The analysts anticipate a high incremental margin revenue stream, estimating an EBIT (earnings before interest and taxes) margin of approximately 50%. This projection takes into account Amazon’s leading consumer data set, integration with connected TV (CTV), and emerging generative AI tools that enable more personalized and targeted advertisements. However, the analysts highlighted several uncertainties that could impact the projections.

One major factor is the pricing of the ad-free upgrade, which would determine the number of users willing to stick with the ad-supported tier. Additionally, if Amazon chooses to invest a significant portion of the revenue from the ad-supported tier in costly content, it could affect profit margins. Moreover, the analysts noted that Amazon’s ad revenue could potentially grow faster than anticipated due to performance-based CTV advertising, enabled by the company’s robust consumer data and AI tools.

Assessing the international impact of the ad-supported tier proved more challenging due to limited usage data and regional differences. Nevertheless, the analysts estimated that an ad-supported tier outside the US could contribute an additional $209 million to the 2025 EBIT.

Amazon’s potential entry into the ad-supported streaming market poses an exciting opportunity for the company to leverage its extensive subscriber base and enhance its revenue streams. As consumers continue to embrace streaming services, the introduction of an ad-supported tier for Prime Video could not only provide users with more options but also drive substantial financial gains for Amazon.

Categorized in: