They say imitation is the sincerest form of flattery. Try telling that to Roku (NASDAQ: ROKU).
Amazon (NASDAQ: AMZN) is reportedly working on a free ad-supported streaming video service that sounds an awful lot like The Roku Channel. Roku introduced The Roku Channel in September, and it's quickly grown to become a top five channel on Roku devices as well as a key piece of Roku's strategy moving forward.
Rumor has it Amazon's service, tentatively called Free Dive, will license older films and TV series. It will also be exclusive to Fire TV device users, just as The Roku Channel was originally exclusive to Roku device owners.
Amazon has all of the tools necessary to stop The Roku Channel's momentum dead in its tracks.
An engaged and growing user base
While Roku was one of the first to create streaming devices, Amazon's Fire TV devices have actually become just as popular for streaming video. Twenty-seven percent of streamers regularly use a Roku device to stream video, while 29% use a Fire TV device, according to a recent survey from William Blair analysts.
In fact, Amazon and Roku are two of the only device makers winning share in streaming time, growing at nearly the same rate. Roku's momentum is largely being driven by its efforts in licensing its operating system to television manufacturers. It expects the majority of new users to come from licensed sources going forward.
Amazon's momentum is driven by its growing Prime ecosystem. Amazon continues to drive customers to Prime by expanding Prime-eligible items, adding more cities to Prime Now, integrating benefits with Whole Foods, and expanding its content library for Prime Instant Video. It often sells its Fire TV devices below cost as a way to encourage more viewership for the premium video service it bundles with Prime. Amazon has found that members who watch video regularly are more likely to renew their membership.
Both companies have a lot of momentum with their audiences, but if anyone can take on Roku, it's Amazon.
An advertising business that can support ad-supported video
Amazon's burgeoning advertising business is one of its biggest profit drivers. It could even become its most profitable business within a few years. Amazon's advertising growth has largely been fueled by search ads, as Amazon dominates online product searches. But Amazon's shopper data gives it a wealth of valuable data for targeting video ads.
While Roku has made significant progress in developing its ad technology and collecting user data, it can't compete with Amazon's data. Amazon also has some experience with video advertising during Thursday Night Football and other live sports events it broadcasts on Prime Video as well as advertisements on Twitch. Amazon recently doubled down on video ads on Twitch by removing ad-free viewing for Prime members.
With a strong advertising business, Amazon's ability to monetize ad-supported watch time is greatly enhanced. Therefore, it could afford to spend more on content and still make the same amount of profit as Roku. Not to mention, Amazon has deep pockets to seed its content library.
Moreover, Amazon's advertising capabilities could attract a lot of content partners. A key part of Roku's strategy with The Roku Channel is to help content owners reach a wider audience and share ad revenue with those content owners. So, some of the content isn't directly licensed by Roku, but part of a revenue-sharing agreement. Amazon could offer potentially greater reach and greater returns to content owners for putting their content on Free Dive.
Amazon certainly has the tools to take what Roku did and make it better. We've seen instances in the recent past where a larger competitor takes an idea from a smaller competitor and has a lot more success than the original (e.g., Instagram Stories). Amazon's Free Dive may be the next example.
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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. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.