The fastest-growing segment of streaming video content is ad-supported video on demand, or AVOD. Cord-cutters are looking to save money on video entertainment, so there's a limit on their demand for subscription services like Netflix , Amazon (NASDAQ: AMZN) Prime, or Hulu. That's why Roku 's (NASDAQ: ROKU) management says AVOD viewing growth outpaces everything else on its devices.
Amazon operates a subscription video service as part of its Prime membership, but also recently launched IMDb Freedive, an AVOD service available online and on Fire TV devices. The move capitalizes on Amazon's growing advertising business and the strength of its Fire TV device sales to bring free content to consumers in a way that could be immensely profitable for Amazon.
Image source: Amazon.
Adding digital video advertising to the mix
Amazon's advertising business is already growing rapidly. Its "other" revenue line item, which consists mostly of advertising revenue, more than doubled through the first three quarters of 2018. (Note that growth is inflated somewhat by changes to accounting standards in 2018.)
Amazon's advertising currently consists mostly of ads shown in its search results pages and in product listings. Some analysts have questioned whether Amazon's search results are becoming overcrowded with sponsored listings, which would stymie its growth going forward.
Digital video advertising represents a massive opportunity for Amazon to leverage its marketplace and its consumer data. What's more, advertisers are quickly shifting their spending from traditional television ads to digital video ads. The latter grew 30% year over year in the U.S. last year, while traditional TV spending was practically flat.
Amazon already sells a very small amount of video ads as part of its Thursday Night Football ad packages. Amazon gets about 2 minutes of ad time per hour of broadcasting, which adds up to about 120 30-second commercials over the course of its entire season run. Freedive presents an opportunity for Amazon to expand on what it's learned over the last two football seasons and capitalize on the rapidly growing digital ad market.
Creating more digital advertising opportunities
Not only does IMDb Freedive create new digital video advertising opportunities, but the strategy Amazon is taking could open the door for additional display advertising as well.
Amazon chose to launch the service under its IMDb brand. It plans to support mobile streaming via the IMDb app. In effect, Amazon is using free video streaming as an incentive to download another one of its apps. Developers spend tons of money pushing consumers to download and install their apps with things like app-install ads or incentives for downloading and signing up. Amazon found a way to create an incentive to download the IMDb app that also has the potential to generate a profit itself.
Amazon sells display advertisements on IMDb, partnering with media companies to show movie trailers for new releases. More eyeballs on its website, and on its app, could increase that revenue stream.
Improving Fire TV sales
Amazon is likely to keep Freedive exclusive to its Fire TV platform for connected TVs. Fire TV is already one of the most popular ways to stream video on a television, according to a survey from William Blair last summer. So, Amazon isn't sacrificing significant reach for Freedive by keeping it exclusive, plus it has the ability to promote the service to a relatively large audience for free. It could, in fact, incentivize some customers to buy a Fire TV device instead of a competing device like a Roku player.
Fire TV devices present yet another avenue for Amazon to grow its business. Fire TV works best with a Prime subscription, and it really starts working for consumers when they subscribe to premium subscription video services via Prime Channels. Doing so enables Fire TV users to see all their available content right on the home screen.
Amazon says it has 30 million active Fire TV users, more than the 27 million active accounts Roku reported earlier this month. Roku has taken the approach of expanding its Roku Channel, its own AVOD service, to platforms beyond its own devices. That's because the potential distribution and advertising sales lost from not owning the platform are minimal compared to the potential for increased reach. That's especially true after Roku introduced premium subscriptions in the Roku Channel.
Offering IMDb Freedive as an incentive for consumers to use IMDb and Fire TV can boost both businesses. At the same time, it offers a new set of inventory for Amazon's digital advertising business. And the demand for the product ought to be strong considering the trends in video streaming and Amazon's position in the streaming player market.
10 stocks we like better than Amazon
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Amazon wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of November 14, 2018
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy .