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Amazon plans to start running commercials on Prime Video starting early next year, essentially converting a subscriber-supported service to an ad-supported platform.

There will be an option for users who don't want ads.  They will be able to pay $2.99 a month - or almost $36 a year on top of the $139 annual Prime membership - to watch Prime Video commercial-free.

Amazon already runs ads on its live sporting events, such as Thursday Night Football.

The Information writes that "Amazon’s decision to put ads on Prime Video is especially notable because the company has previously framed its streaming service as a perk that encourages customers to shop on its e-commerce site and keep renewing their Prime subscriptions, rather than a major moneymaker in itself. Amazon spent about $7 billion on original streaming shows, licensed content and sports rights in 2022, up from around $5 billion the previous year."

Variety writes that Amazon is "one of the last mainstream streaming services to eschew the injection of regular commercial breaks into its movies and shows … Amazon follows a host of other streaming hubs — including Disney+, Netflix, and Warner Bros. Discovery’s Max– that also offer ad-supported tiers, a move that suggests the world of streaming may just eventually mirror the world of traditional television in the not-too-distant future."

The New York Times notes that "Netflix reported a rise in revenue in the second quarter of this year and added 5.9 million subscribers, growth that it attributed to a new ad-supported membership tier that was introduced in November, as well as a crackdown on password sharing. In July, Netflix said it would no longer allow customers to sign on to its $9.99 monthly ad-free subscription plan. New subscribers could instead choose between an ad-supported plan for $6.99 a month or one of two ad-free options that cost either $15.49 or $19.99 a month."

Also from Variety:

"The company says it plans to run fewer ads on Amazon Prime Video than traditional broadcasters or broadband rivals. Four minutes per hour seems to be a benchmark for the lowest amount of ad time on a streaming platform."

"Most media-sector executives agree that streaming video represents the future of the business, and companies ranging from NBCUniversal to Apple have scrambled to make comedies, dramas and sports available to people who no longer watch traditional broadcast or cable TV. And yet, doing so is costly, requiring millions of dollars in content and infrastructure costs — all while new entrants take to the field. Wall Street initially encouraged companies like Paramount Global and Fox Corp. to chase after Netflix, Amazon Prime Video and Disney’s Hulu. Now, investors are demanding timelines of when all the activity will be profitable."

"Most media and content platforms have embraced at least some form of advertising, the executive says, and the companies that run such operations will need to govern the flow of commercials, lest consumers perceive streaming to be as stuffed with ads as the TV networks they once watched. 'I’m not certain that advertising solves all problems,” he says. “It could make some of them worse'."

KC's View:

I've already talked a little about this in FaceTime this morning, but let me take another angle here.

It may indeed be true that the streaming business model, as originally conceived, was fatally flawed.  Quite frankly, most of the streaming companies have pretty much conceded this.  It was too expensive, and required way too much investment before getting to profitability.  And, at this moment in time, investors are not inclined to be patient.

I would also agree with the notion that advertising does not solve all the problems that streamers have.  I think that their biggest problem is that they're spending way too much money on mediocre content - it has been about quantity, not quality, and not creating films and TV series that are distinctive and differentiating.  At the same time, the streamers have moved to a one-episode-a-week distribution system, abandoning the drop-the-whole-series bingeing model that differentiated them from broadcast TV.

So let's accept that premise that streaming isn't economically viable.

Amazon is different from most of the other streamers in that its content was a means to an end, not the end itself.  The goal was to drive Prime memberships, which generate more sales for the company overall.  Amazon pretty much admits that this new shift is a cash grab, but there is a point at which Amazon's customers - in this case, its best customers - are going to think the company is going too far.

When Netflix instituted an ad tier, it priced it belowthe ad-free tier, and that brought in new subscribers.  But Amazon is going the other way, basically charging us $36 more a year on top of our $139 annual fee, to get what we've been getting all along.

How much can we spend?

I think Amazon should've gone the other way - come up with a variety of tiers that allow people to choose.  Want just two-day delivery, it costs X.  Want just Prime video, it costs X+Y.  Want the whole schmegegge?  It costs X+Y+Z.

I believe that Amazon is miscalculating here.  It is treating its customers like commodities, not like assets with which it has developed relationships over the years.  And I think it is a mistake, and may reflect a lack of understanding of how Amazon traditionally has seen its customers.