Amazon's Pitch to Win Digital Video Ad Dollars

Amazon (NASDAQ: AMZN) has a simple pitch to marketers for its digital video ad inventory on Fire TV devices: follow the money.

80% of Amazon's 34 million Fire TV users are Prime members, according to a pitch deck seen by Business Insider. Amazon also cites various other data that shows its audience is generally more well off than average television viewers.

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In exchange for distributing ad-supported streaming video services on its Fire TV platform, Amazon often gets a share of their ad inventory to fill on its own. Roku (NASDAQ: ROKU) has a similar policy. The standard is 30% of inventory. Both companies also have their own ad-supported video services.

Amazon's pitch to marketers stands in contrast to Roku's pitch and its recent efforts in developing ad technology. Roku wants to help marketers reach audiences it can't reach through traditional TV advertising because many of its users have cut the cord. Cord-cutters are often seen as trying to save money, and they may be seen as a less valuable audience to some marketers compared to Amazon's audience.

A group of self-selected buyers

It makes sense that the vast majority of Fire TV users have a Prime subscription. The platform is designed to help Prime members get the most out the Prime Video perk available with the $119 per year membership. Prime Video content is highlighted in the user interface.

Prime members are a valuable demographic for marketers. They spend an average of $1,400 per year on Amazon.com compared to about $600 for non-members, according to a recent survey from Consumer Intelligence Research Partners. Amazon also cites data from eMarketer that says they're more likely to have a six-figure household income compared to non-members.

Amazon is certainly playing up the idea that its audience is full of wealthy spenders. Advertisements are more likely to convert into sales when the viewer's disposable income is high and they have a stronger propensity to buy. That could result in more ad dollars flowing from traditional TV to Amazon's digital video ad platform before marketers look at other options like Roku. It might also mean Amazon's able to produce higher average ad prices, and it could open the door for greater revenue share opportunities like those Roku has pursued.

Should Roku investors worry about Amazon?

Amazon has a lot working in its favor with its lead in active users and its attractive audience characteristics compared to Roku and other digital video advertising platforms. But Roku has a few things working for it as well.

First of all, as a much smaller company than Amazon, it's able to move more quickly to develop tools and products for its advertising and content partners. It's also intensely focused on the streaming platform, while that's a relatively minute part of Amazon's business.

Additionally, Roku is seen as more of a partner to content providers than Amazon. While Roku fully controls some content on the Roku Channel, it also partners with content providers with revenue-share agreements. The company is more interested in developing an ecosystem of free content. As a result, Roku may have more ad inventory to sell marketers.

Amazon, meanwhile, wants users to watch Prime Video content so they have yet another reason to keep their Prime membership when it's up for renewal. That creates a conflict of interest when it comes to promoting other content providers' channels.

Furthermore, Roku's pitch to advertisers is that they can reach an audience they can't reach on television due to cord-cutting. That's likely true for Fire TV users as well, but wealthier consumers are less likely to be cord-cutters than lower-income households.

Most importantly, Roku is still a close second behind Amazon for marketers looking to reach consumers via streaming video. As more viewing hours shift from traditional television to streaming, ad dollars will follow. And that's going to have a more outsized impact on Roku's business than on Amazon's.

Roku's focus and the secular trends ought to ensure it's still one of the best ways to invest in the growing popularity of streaming video. Amazon's success doesn't preclude Roku from succeeding as well.

Amazon has a strong message to marketers, but Roku doesn't have too much to worry about.

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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 recommends Roku. The Motley Fool has a disclosure policy.