May Launch an Ad-Supported TV App -- Why It Matters

Shares of Roku (NASDAQ: ROKU) were rocked on Wednesday, falling about 5% as of 9:46 a.m. EDT. Some investors were likely spooked by the news that Amazon (NASDAQ: AMZN) is reportedly planning to launch an ad-supported video service for its Fire TV users. The move would put Amazon in more direct competition with Roku, whose business model is highly reliant on its fast-growing advertising revenue.

It would make sense for Amazon to make a big bet on ad-supported internet television. The opportunity in the space is undeniable, evident by Roku's soaring ad revenue and rapid growth in connected-TV ad spending at ad-buying platform The Trade Desk (NASDAQ: TTD).

Amazon's bet on ad-supported video

The rumored ad-supported video app, which would reportedly be separate from Amazon's Prime Video service, will be developed by the e-commerce giant's IMBb subsidiary, according to The Information (subscription required). For its sources on this scoop, The Information cited "people familiar with the situation."

As The Information notes, Amazon has already been dabbling with ad-supported video by rolling out ads within shows on IMBb, in videos at its live-gaming subsidiary Twitch, and during NFL games on Prime Video.

The new service is tentatively named Free Dive, according to the report.

Wild momentum

A move to launch a dedicated ad-supported video app would come amid big tailwinds for Amazon's fast-growing ad business. The e-commerce company tipped investors to the roaring growth it is seeing in its ad business during its first-quarter earnings call when management said its advertising had become a multibillion-dollar business.

Amazon's momentum in advertising persisted into Q2. The company's "other revenue" segment, which is primarily driven by advertising sales, saw revenue soar 132% year over year in Q2, or 64% after excluding the additional $640 million in revenue Amazon recorded in the segment because of the adoption of a new accounting standard.

While Amazon's advertising revenue is still small compared to the company's overall momentum, it's "starting to make an impact on gross profit," said Amazon CFO Brian Olsavsky in the company's second-quarter earnings call.

A rumored ad-supported TV app would better position Amazon to capitalize on this momentum.

The opportunity in ad-supported internet TV, specifically, is especially evident at Roku and The Trade Desk. Roku said advertising revenue was the largest driver for its 96% year-over-year growth in platform revenue in Q2. Meanwhile, The Trade Desk saw ad spending in connected TV double sequentially in Q2 -- and that's building on a 2,000% year-over-year increase for connected-TV ad spending in Q1.

The Trade Desk CEO Jeff Green said in a recent interview with Australia's B&T that he believes the growing cost of content will even prompt streaming TV leader Netflix to eventually launch ads.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks owns shares of The Trade Desk. The Motley Fool owns shares of and recommends Amazon, Netflix, and The Trade Desk. The Motley Fool has a disclosure policy.