This week saw intense media coverage of Amazon’s disappointing earnings, which tended to focus more on whether Jeff Bezos would lose his position as the richest man in the world, rather than on the fundamentals of the business.
While it is tempting to focus on the negative aspects like sky-rocketing shipping costs or decreasing profit margins, a couple of metrics are clearly going in the right direction: advertising and streaming.
Amazon’s advertising revenue was up more than 40% year over year, generating more than $3.6 billion in revenue for the company. This massive haul comes at a time when most of the major advertising holding companies are reporting disappointing third quarter results. The network effects of the Amazon business model have long been lauded as proof of the brilliance of Bezos’ strategy, and we are now seeing these same forces play out in the nearly trillion dollar advertising industry.
On the streaming front, there is a lot for Amazon to be happy about. There are three main races unfolding in the streaming wars — content, distribution, and ad-supported TV — and Amazon is one of the only major players that has a horse in all three.
In terms of content, Amazon has the breadth and depth of Netflix, Disney, and Apple and stands as one of the players planning to inject billions of dollars into creating premium, original content that will draw people to its service. It has been incredibly effective to date. With 47 Emmy nominations this past year, and shows like Fleabag, The Marvelous Mrs. Maisel, and others breaking into the mainstream – including the newest hit show, The Boys (more than 8 million viewers consumed the entire season in less than a week) – Amazon has proven it has the content chops to compete and draw in audiences. Bezos made clear the network effect of his content wins when he said “When we win a Golden Globe, it helps us sell more shoes.” And herein lies the critical value differentiator Amazon Prime Video has for the company: It is purely a further tie, a value add, that binds users to Prime membership. According to a 2018 CIRP report, Prime members spend more than twice as much annually on Amazon as do other customers, shelling out more than $1,400 a year for goods.
In terms of distribution, Amazon not only has massive reach with Amazon Prime Video, but it is competing fiercely with Roku to own the living room. Its Fire TV hardware products are extremely popular, and it is building out its business of licensing its connected TV operating system and getting Fire OS preinstalled on Smart TVs. This business is driving the success of Amazon’s Channel Store, where it lets users subscribe to other content platforms like HBO and Showtime and takes a recurring revenue share of the subscription rates. This alone has become a billion dollar business. The network effects continue.
Bringing it back to advertising, Amazon’s 40% increase in advertising makes it the third largest player in digital advertising in the world after Google and Facebook. The network effects of the company’s in-house advertising capabilities tie directly into the company’s streaming strategy. There is $70 billion spent on television advertising in the US alone, and today only 5% of that is spent on streaming, despite recent research showing a majority of US adults now stream. And we’re streaming a lot – far more than we watch traditional television. This sea-change in consumer habits heralds an equally large migration of television dollars into digital channels addressable by Amazon.
Amazon will have multiple bites at the very high margin advertising apple as its business continues to invest in the streaming content space. Aside from selling advertising on its own platforms where search and display is a strength, Amazon will also sell advertising for many of the 150+ content apps it allows onto its platform. Amazon also owns the world’s most popular streaming video gaming channel – Twitch.TV. In the past three months, 2.7 billion hours of live content was viewed on Twitch, nearly four times the total content watched on YouTube. Twitch also has agreements with sports leagues, including the NBA and the NFL. This platform is now 100% ad supported and draws an incredibly desirable and hard-to-reach audience for advertisers: “younger, incredibly digitally savvy consumers who use ad blockers.”
Finally, the third pillar in Amazon’s advertising strategy is its own content channel, IMDb TV, which debuted in January, and was rebranded in June. This channel is stocked with movies and TV shows, and Amazon has announced plans to triple the content – all of which will be free and available via an ad-supported model.
The sky is certainly not falling for Amazon. The network effects are profound, and the ties binding Prime users ever closer to the house that Bezos built continue to strengthen. Amazon is playing the long game, continually reinvesting in the future. And when it comes to streaming and advertising, these investments are paying off.
Dallas Lawrence is the Chief Brand Officer for global advertising exchange OpenX. Prior to joining OpenX, he served as the Chief Communications Officer for Rubicon Project and served as the chief global digital strategist for Burson-Marsteller. You can connect with him on Twitter @dallaslawrence.