Who Wins In An Ad-Free Video World? I'd Bet On Amazon

  • by , Featured Contributor, January 19, 2017
On average, Americans today watch four and one half hours of television every day, with the better part of an hour of that viewing on ads. This viewing is under pressure from streaming video-on-demand services like Netflix, Hulu, Amazon Prime Video and HBO Now.

While five years ago some may have thought that these streaming services would only grow to be complements to traditional television viewing, akin to updated versions of the premium cable channels like HBO and Showtime or video rental stores like Blockbuster, it’s clear that they now represent a real and existential threat to traditional TV viewing. Probably 15%-20% of all premium video viewed in the U.S. today is provided through a streaming service. While some of this viewing might be incremental to TV viewing,  a significant part of it is now replacement viewing.

Yes, streaming services are starting to eat away at multichannel TV. This is most evident with the introduction and consumption of “skinnier” cable TV bundles, and there is no reason to think that this won’t continue. Without question, this will have significant negative consequences for many TV networks, but I wonder if many folks have considered the most serious consequences that this may have for the marketing industry overall.



What if 50% of today’s linear TV viewing shifted over to streaming services over the next three or four years?

A lot would happen. Hundreds of billions of dollars of retail brand sales could be put in jeopardy, while brands’ relationships with retailers would change dramatically. Here’s why:

Loss of ad-supported TV means massive loss of opportunities to reach U.S. consumers. Linear TV programming has 12 to 16 minutes of ads every hour. The streaming subscription services have virtually none. Marketers like McDonald’s, Coca-Cola, Gillette, State Farm and General Motors depend on TV advertising to reach tens of millions of consumers every day with multiple high-impact sight, sound and motion messages at affordable costs. In highly competitive markets, if marketers don’t reach and remind both existing and potential customers of their products and promotions, sales drop, sometimes precipitously.

Limited ability of other media channels to substitute for TV. No other media channel today can come even close to TV when it comes to reaching lot of people fast and cheaply, with impact. Don’t forget, this afternoon “Judge Judy” delivered more audience ad minutes in a 30-minute show than did all of the videos on all of YouTube in all of America all day. Yes, radio, Facebook and Youtube can reach a lot of people. So can digital out-of-home and mobile, but these channels are still nascent and not yet fully ready to step up and replace 50% of TV.

TV ad pricing goes up, probably by a lot. TV ad prices rise when demand increases more than supply. That has been the case for decades. However, if you normalize the dollars to inflation and look back decades, the rise hasn’t been that out of whack. That will change if streaming services displace a big chunk of linear TV ad inventory. A 50% drop in supply and no change in demand would almost certainly mean that prices would double — which might be a conservative estimate, since the bidding would be even more intense, likely leading to even bigger increases.

Big retailers’ leverage over brands would increase substantially.  If slotting fees were a problem for brands before, they will get even worse. If brands don’t have TV ads to inform and persuade millions of people to choose their brands before they get to the store, brands will have to pay up even more inside the store to stand out from their competition — whether that means slotting fees, lower prices or package discounts. Whatever it takes, it will be expensive.

It’s hard to say exactly who all of the winners will be in this scenario, but one company certainly stands out as a very likely big winner in a future where one-half of TV viewing shifts quickly to streaming services: Amazon.

Why? First, Amazon is a strong and growing player in providing streaming video services, whether through its Prime Video, as a partner to HBO and Showtime or through its Twitch service. More streaming video means more customers.

Second, the “Everything Store” is by far the largest online retailer in the U.S., and beginning to challenge top incumbents like UPS and FedEx as one of the country’s largest delivery and logistics services. If brands like Gillette can’t communicate to their prospective customers on TV anymore, they will find themselves much more dependent on Amazon to keep them from losing market share to competitors like Dollar Shave Club.

Third, Amazon is a company built on disruption, better prepared to handle change and exploit it at scale than virtually any other company in the world. If the TV ad business turns upside-down overnight, I’d bet on Amazon to find ways to exploit it.

What do you think? Will the premium video business go streaming and ad-free? And, if it does, is Amazon the big winner?

19 comments about "Who Wins In An Ad-Free Video World? I'd Bet On Amazon".
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  1. Ed Papazian from Media Dynamics Inc, January 19, 2017 at 6:49 p.m.

    Wayne, it is most unlikely that such a large proportion of linear TV viewing tonnage--time spent---will go to SVOD services unless said services provide a full menu of sports and news coverage, as well as tons of other non-primetime entertainment program types---game shows, cooking shows, documentaries, golden oldie TV reruns, talk shows, late night talk-varieties, political commentaries, crisis coverage, election night coverage, etc. that comprise the majority of the average person's TV diet. At present, they are competing mainly in the movie and primetime entertainment arena. If, however, a miracle happened and half of TV viewing switched to SVOD---the likely result would, indeed be a huge increase in TV's CPMs and, probably ad clutter. But beyond that, the SVOD players would, very likely, get into the ad selling business, offering subscribers ad-free as well as reduced fee plus ads, options.

    What I believe will really happen will probably see a major shift by traditional TV programmers into SVOD, partly to off set primetime entertainmkent program cost risks by garnering incomes from SVOD subscribers first, then using the same content---which many viewers would not have seen before---on their ad-supported schedules. The traditional guys will also be able to develop many other types of fare---news, certain types of sports content,talking head shows, etc. ---to entice SVOD subscribers who favor such genres---and increase their share of the SVOD market. They have the wherewithall to pull this off, not most of the current SVOD players.

  2. Ed Papazian from Media Dynamics Inc, January 19, 2017 at 7:04 p.m.

    Apologies, Dave. I must have Wayne on my mind.

  3. Dave Morgan from Simulmedia replied, January 19, 2017 at 7:19 p.m.

    Ed, I agree with you that the idea of 50% shifting that fast is not truly realistic, though many in the industy actually think it might happen. As you point out, it certainly can't happen without part of the shift being driven proactively byTV programmers themselves to manage their businesses that directly. This week's news about NBCU's Esquire dropping multi-channel distrubiont and going OTT is a good example. However, even if it doesn't get to the 50% level and only hits 20 or 30%, that a lot of lost TV ad supply and would probably be pretty consequential.

  4. Dave Morgan from Simulmedia replied, January 19, 2017 at 7:19 p.m.

    No worries. Proud to be called Wayne too :-)

  5. Doug Schumacher from Zuum, January 19, 2017 at 9:24 p.m.

    If the traditional TV programmers move to SVOD, which seems likely to me, what's the UX for channel surfing?

    Flipping through different programmer apps on the mobile while chromecasting? It's definitely not as mindless as the remote and it's accompanying show guide. 

    For me, an early cord-cutter, the biggest challenge has always been figuring out what's on what SVOD service. I have to imagine content search and play will be amalgamated in some way. If not, the TV programmers will need to build brand preference like never before, as once someone's on their app, the barriers to switching will be much larger than what's currently the case. 

  6. Seth Ulinski from, January 19, 2017 at 10:15 p.m.

    Great piece, Dave. As you know, the ad-supported model is in jeopardy due to a variety of factors in the digital realm. It will be really interesting to see if Amazon embraces product placement or other avenues to maximize video revenue opportunities. The industry is ripe for new business models.

    How about Netflix as a formidable competitor? I wouldn't count them out based on the quality/quantity of content they are producing, coupled with a loyal/growing subcriber base. 

    Akin to Google, Amazon's heavyweight status across so many business areas (e.g. cloud, ecomm, ads, logistics) could make Netflix a white knight as legacy TV players evaluate alliances (read: here at Netflix we do no evil, we chill). Of course Alexa will probably have something to say about this...

  7. Ed Papazian from Media Dynamics Inc, January 20, 2017 at 9:22 a.m.

    One of the common misconceptions about SVOD and "linear TV" is the assumption that they are always in direct competition for the viewer's time. While it is true that younger , lighter viewers have reduced their primetime exposure to broadcast network entertainment shows and much of this has gone to Netflix, et. al. , it is also true that as the pulblic is given more and more program sources to choose from, total TV consumption increases. The average adult once watched only three hours of TV daily, but as program content expanded into the morning and late night hours, this increased and, again, as more independendt stations and then cable appeared, total viewing time kept rising. Finally, add in SVOD and some digital video viewing and the average adult---if you believe the surveys---is consuming something like six hours of TV/video per day. In  this context, as traditional TV programmers move into SVOD---in part with content they plan to use later on their "linear TV schedules, in part with original SVOD fare----they will not be totally cannibalizing their linear TV audience tonnage. This will be the case to some extent, but a good deal of their SVOD  time spent volumetrics will be added TV consumption by those involved.                                

  8. Dave Morgan from Simulmedia replied, January 20, 2017 at 10:20 a.m.

    Ed, I agree that the presumption that SVOD and TV viewing are inevitably in competition is wrong. For sure, the introduction of robust, accessible and affordable streaming services are creating even more total video viewing than we had before. However, it is also now clear that there is some share shift of viewing happening and, maybe more importantly, the reduction of channels in some multi-channel bundles is accelerating the shift, whether intended or not, and potentially creating a self-reinforcing 'death spiral' for networks since the more they pull networks like Esquire out of bundles the more those networks will shift to OTT only and the more viewing will shift to streaming services.

  9. Dave Morgan from Simulmedia replied, January 20, 2017 at 10:26 a.m.

    Seth, I'm not sure that Netflix has the chance to win at the same level as Amazon will. Today, Netflix's only economics are generated from what it can get consumers to pay for video content. It certainly has a great business, but Amazon is converting the same video content as Netflix into a "free toaster" to get people to subscribe to its buying/delivery service, which drives much more powerful economics and network effects than Netflix is ever likely to achieve. It may be perceived as a White Knight to networks, but only because it is helping them fund their studios and content production. However, if they lose their ad revenue streams over time, they may end up as just high end 'job shops' making content. Not the most powerful and defensible business model.

  10. Darrin Stephens from McMann & Tate, January 20, 2017 at 2:41 p.m.

    Don't forget, Judge Judy's ratings are based on the cume of two episodes added together, and any attendent reruns (usually overnight) are thrown into to the stew.

    Her ratings are good, but not as good as you think.

    Other syndicated shows (particularly off-network reruns) pull the same trick. The networks and cable are not allowed to do that.

  11. Henry Blaufox from Dragon360, January 20, 2017 at 3:08 p.m.

    Dave, isn't the 50 percent decline in linear viewing you posit a straw man to some extent? What is the basis for that extrapolation? As for the loss of advertising slots and impact on brands, it seems to me the first to suffer would be new products. They'd need a new, effective way to announce their existence and value to consumers. A new cracker from a hitherto unheard of company might have a lot of trouble gettin g noticed, but Ritz and Triscuits will still be on the shelves and top of mind (or close) when we shop that aisle.

    As for alternative messaging channels,  how many of you with far more industry expertise than I have believe that SVOD will remain ad free if it builds enough scale? As that happens (if it does,) audience targeting will have progressed further. In that case, won't the two complement each other in ways we haven't thought of yet?

  12. Doug Garnett from Protonik, LLC, January 20, 2017 at 5:25 p.m.

    One key question about any loss in linear viewing is whether those who go elsewhere were key to advertising impact. On Ed Papazian's website there's an interesting analysis of the viewing quintiles. And it's consistent with my experience.

    It may well be that the seriously lost viewers are the bottom quintile - the ones who weren't very valuable in the ad equation. These viewers have, we know, always been out there - light TV users, late to sign up for cable (if at all), etc... They are also the ones I hear passionate stories from when they switch - acting as if they were serious TV viewers.

    All that means that the impact on advertising could well be negligible. What I care about for my clients is delivering impact at the store. If TV loses some viewers who aren't going to be important in driving impact at the store, I really don't care.

    We must be cautious becasue the investor hype around Amazon, Netflix, and others desperately NEEDS to paint a picture of the destruction of TV. But we all keep buying into that hype - never connecting up reality that 3D TV was a bust, curved TV is a yawn, VR is going to be pretty uninspiring, digital advertising still doesn't drive significant impact, Amazon doesn't make money on it's retail equivalent sales - but primarily on cloud services.

    These companies are ALL in the business of trying to tell us they're taking over the world. We should be in the business of challenging them. Unfortunately, the ad biz has a history of dashing around after the shiny new bauble without ever checking it's sanity.

  13. Kenneth Hittel from Ken Hittel replied, January 20, 2017 at 5:51 p.m.

    Doug, it's = it is, not its. That aside, as Bezos has said, "your margin is my opportunity." This does not mean that "Amazon, Netflix[,] and others NEED the destruction of TV.

  14. Dave Morgan from Simulmedia replied, January 20, 2017 at 6:08 p.m.

    Darrin, very good point. Thanks so much. Of course, the way Judge Judy's ratings are determined prevent perfect apples-to-apples comparison to national cable and broadcast shows; but, the way syndication shows report ratings are very consistent with how digital video is reported and makes it a very relevant way to compare Judge Judy's ad load to all of YouTube.

  15. Dave Morgan from Simulmedia replied, January 20, 2017 at 6:15 p.m.

    Henry, Yes. I put up the 50% as a stalking horse. However, I do think that the only issue will be the time period, not whether SVOD can hit that percentage. It may take 5 or 6 years, but I do think it will get there. Also, while I'm probably in the minority here, I also think that most of SVOD will stay ad free. Yes. I remember well when pay cable networks like MTV started and we all thought that viewers would never tolerate both paying for the programming and also getting ads. But now, with SVOD and the ability of companies like Amazon to distribute if with virtually no incremental cost on the margins, we are very likely to see premium video become a free 'premium' bundled into more and more Prime-like subscription services, whether for shopping or insurance or banking or transportation ("buy your Ford today and get 2 free years of premium video viewing"). In a world like that, I think that ad-free will win big with consumers over ad-interrupted and, therefore, will be table stakes for video subscription or video 'premium' packages.

  16. Doug Garnett from Protonik, LLC, January 23, 2017 at 5:41 p.m.

    Sorry for the typo. Autocorrect has become quite unreliable lately. Or ham handed operation. :-)

    Bezos said that. But it's a problem for him. It inherently implies low margins. Yet the only reason Amazon has become profitable is unique, very high margin cloud services (10% of their revenue delivers 75% of their profit). And those places where he's chasing margin are decidedly unprofitable and Wall Street is showing impatience with that truth after 25 years.

    Let me see. Isn't that the way old school biz school recommended it? Build something people want that you can charge enough for and make a profit? His "in the margin" efforts violate that. And while he was quite clever in controlling investor response to fund huge losses for a couple of decades, his future lies in high margin business.

    So I think my comment is quite accurate:  it is our job to be skeptical. Not to reject unduly.  But to scrutinize thoroughly and reject things that aren't smart.

  17. Dave Morgan from Simulmedia replied, January 23, 2017 at 5:48 p.m.

    Doug, Yes. Folks have been saying for years that Bezos would run out of room, but he keeps find new high margin businesses that can leverage value built in adjacent businesses. It's interesting to know that more people buy more books today than they ever did, so he certainly knows how to grow unit volumes in markets by creating more choice and lower prices. I think that Amazon and its investors will find that premium video will be a very nice complement to e-commerce and digital data storage/delivery and that fact that they can deliver it on the margin for free will give them a lot of profit potential once they pay down the cost of creation and/or acquisition. This will be fun to watch.

  18. Ed Papazian from Media Dynamics Inc, February 24, 2017 at 9:02 a.m.

    As noted elsewhere, it's" Dave", not "Wayne". in my opening, above.

  19. Andreas Schroeter from wywy, February 24, 2017 at 9:36 a.m.

    Great discussion. I would like to add a link to Ben Thompson's Stratechery blog on how TV is evoling:

    It' worth a read, some great thoughts on how TV's bundling business model will need to change, as already pointed out by Dave with the "skinnier" TV bundles.

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