Free Amazon Prime Streaming Video: Crazy or Crazy Brilliant?

by Brad Moon | March 28, 2014 11:56 am

Free Amazon Prime Streaming Video: Crazy or Crazy Brilliant?

Well, something is going down at Amazon (AMZN[1]).

Free Amazon Prime INtro Free Amazon Prime Streaming Video: Crazy or Crazy Brilliant?[2]Amazon is holding an event next week where it’s promising an update on its video business. However, ahead of the event, sources are claiming (and Amazon is denying) that Amazon Prime streaming video could be coming to that set-top box[3] — for free.

If it is true, this makes for interesting times if you happen to be an Amazon Prime customer … or a streaming video company like Netflix (NFLX[4]), or the maker of a set-top streaming video box like Apple (AAPL[5]) and its Apple TV, or heavily invested in the video game console business like Microsoft (MSFT[6]).

The catch to Amazon Prime’s supposed new announcement is advertising. To get free streaming video, you’d have to sit through ads.

There is some credibility to the rumors. After all, Google’s (GOOG[7]) YouTube is ad-supported to the tune of an estimated $5.6 billion in revenue in 2013[8]. And Amazon has gone down the ad-supported path before, with the Kindle and Kindle Fire “With Special Offers” editions, which discount the price of the hardware in exchange for advertising on the home screen.

If the company is on the verge of announcing a free, ad-supported version of Amazon Prime streaming video, it could be a rare misstep on AMZN’s part. Or it could be a brilliant move that disrupts the streaming video industry.

Here’s why:

People Hate Ads

Outside of the Super Bowl — when ads become a form of entertainment in and of themselves — most people hate having to sit through commercials.

One of the great promises of DVRs and TiVo (TIVO[9]) was the ability to watch TV on a delay and be able to skip ads. Lack of commercials also is high on the list of reasons why people cut the cord and bail for streaming video services like Netflix. And when you look at Netflix competitors that use an advertising model — such as the network-backed Hulu — you’ll find message boards dominated by complaints about the ads[10].

Apple reportedly has been in discussion with networks[11] about ad-skipping — specifically, the possibility that a future Apple TV could broadcast TV shows (acting like a cable company) while removing those ads, but compensate networks for lost revenue.

The point is, if AMZN were to offer Amazon Prime streaming video for free, with ads, it’s liable to annoy people enough that they ignore it, free or not. That would cut into AMZN’s ability to pay for the video rights they would have negotiated.

… And Amazon Prime Customers Aren’t Exactly Happy Right Now

AMZN is already hiking the yearly membership fee for its Amazon Prime customers. Thing is, the current perk of Amazon Prime streaming video is partly why people were willing to pay $79 a year.

Jacking Amazon Prime up to $99 yearly, then taking one of the perks — Amazon Prime streaming video — and offering it to everyone else for free would be quite the PR misstep. Even if that free streaming video remains ad-free for Amazon Prime members and requires enduring commercials, banner ads or pop-ups for everyone else.

Amazon reportedly has been casting around for more perks to offer Amazon Prime customers (streaming music, for example[12]) to make that cost increase more palatable. Still, removing or diluting an existing perk like exclusive access to streaming video has high potential to backfire.

… And Cable Companies Will Hate It

We all know what the cable companies think about Netflix. The deal struck with Comcast (CMCSA[13]) to secure faster and more reliable Internet access for Netflix customers[14] is probably just the first in a growing battle between Internet service providers and streaming video companies.

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Cable companies do not like the fact that low-cost video streaming services cost them cable subscribers while adding to their network infrastructure requirements. Netflix alone is estimated to account for up to one-third of U.S. Internet traffic during peak time[15].

If AMZN were to successfully launch a free, ad-supported Amazon Prime streaming video service and it caught on, the kind of numbers involved could be Netflix all over again. ISPs are not going to want to foot the cost of improving the network capacity to help out Amazon, so the result is likely to be what some Netflix customers have experienced — streaming video that stutters, stops for extended periods for caching and becomes unwatchable in high definition.

Worse, if ISPs were to single out streaming video from Amazon, they wouldn’t be differentiating between the freebie ad-supported service and the premium Amazon Prime streaming.

Amazon’s margins are traditionally razor-thin, so shelling out big bucks to ISPs (like Netflix has started to do) will hurt. But if Amazon doesn’t pony up, the streaming video might just end up aggravating free users and paying Amazon Prime customers.

… But Free, Ad-supported Amazon Prime Streaming Video Might Still Be a Brilliant Move

On the other hand, streaming video is about due for a disruption, and Amazon is a company that thrives on disrupting existing business models.

Free Amazon Prime streaming video would certainly lead to a lot of scrambling.

Netflix has had things its own way for a while now, and not everyone wants to pay what AAPL is asking to buy or rent commercial-free TV shows and movies through its Apple TV.

Hulu hasn’t been the runaway hit networks had hoped it would be, and there are dozens of other video streaming services competing for consumer eyeballs. With its visibility, marketing power, catalog of video content (plus a growing catalog of original programming) and a willingness to stick out early losses in the name of long-term gains, AMZN might just be able to muscle its way in, using a free version of its Amazon Prime streaming video service to shake up the status quo.

And although people hate advertising, that $5.6 billion Google collected last year from YouTube shows that there is money to potentially be made from sticking ads in streaming video.

As mentioned, AMZN is denying the rumors[16] that free Amazon Prime streaming might be announced last week. However, something is up.

We’re going to have to wait until Wednesday’s event to find out exactly what it is, but given the reaction over even the possibility of ad-supported Amazon Prime streaming video, you can expect a lot of industry insiders will be watching that event very closely.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Endnotes:
  1. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  2. [Image]: http://investorplace.com/wp-content/uploads/2014/03/Free-Amazon-Prime-INtro.jpg
  3. Amazon Prime streaming video could be coming to that set-top box: http://www.forbes.com/sites/dorothypomerantz/2014/03/27/amazon-reportedly-ready-to-offer-a-set-top-box-and-free-ad-supported-streaming/
  4. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  5. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  6. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  7. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  8. estimated $5.6 billion in revenue in 2013: http://variety.com/2013/digital/news/youtube-to-gross-5-6-billion-in-ad-revenue-in-2013-report-1200944416/
  9. TIVO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TIVO
  10. message boards dominated by complaints about the ads: http://amplicate.com/hate/hulu
  11. Apple reportedly has been in discussion with networks: http://www.macworld.com/article/2044483/apples-tv-ad-skipping-proposition-if-you-cant-beat-em-pay-em.html
  12. streaming music, for example: http://investorplace.com/2014/02/amazon-streaming-music-amzn/#.UzV-39zobZs
  13. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  14. faster and more reliable Internet access for Netflix customers: http://www.nytimes.com/2014/02/24/business/media/comcast-and-netflix-reach-a-streaming-agreement.html?_r=0
  15. account for up to one-third of U.S. Internet traffic during peak time: http://www.cnet.com/news/netflix-gobbles-a-third-of-peak-internet-traffic-in-north-america/
  16. AMZN is denying the rumors: http://www.theverge.com/2014/3/27/5554998/amazon-planning-free-video-streaming-service

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