Prime Video ads could add billions to Amazon's bottom line: Analyst

Amazon (AMZN) aims to roll out its new advertisement plan early next year, running ads on its video streaming service - Prime Video. A report from UBS says it could potentially bring in over $6 billion dollars in incremental revenue for the company. UBS U.S. Internet Analyst Lloyd Walmsley joins Yahoo Finance to discuss Amazon's plan and how it will affect their bottom line.

Walmsley explains the potential upside, "The incremental margins here are quite high. If they can get over time up to something like $6 billion at an 80% incremental margin, you're talking in the neighborhood of $5 billion of incremental operating profit."

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Video transcript

JULIE HYMAN: What role do you think Prime Video plays for Amazon? You know, again, it doesn't get the same sort of hype as some of the other streaming services, although we're showing some of my favorites like "Fleabag" and the video accompanying this chat. But you know, does it, you know, sort of increase engagement, increase Prime membership, et cetera?

LLOYD WALMSLEY: Yeah. So the historic lens that Amazon has viewed Prime Video through is, does adding this to the Prime drive new subs and/or reduced churn in the core Prime business? And there's been-- you know, the company has talked about it a little bit. There's been some interesting reporting out there on how they really dig in and analyze when they roll out a new piece of Prime content, what does it do in terms of driving new Prime s

I think we've seen Prime-- especially in markets like the US, Prime adoption has slowed quite a bit. You've seen it in their subscription revenue line. And so I think they're now at the point where they can start to move the needle more on actually directly monetizing this through ads. And so that, I think, is what's behind this move as they shift-- shift focus more broadly towards a sharper focus on profitability broadly.

- And with ads, Lloyd, you know, you've crunched the numbers, I'm sure. For investors who are listening right now, what is it-- what does it ultimately mean-- bottom line, what could it mean for revenues and EPS?

LLOYD WALMSLEY: Yeah, what we wrote in our report overnight, we think conservatively it could add $3 billion if they're just showing three minutes of ads every hour under the current-- what we've heard from advertising-- the advertising community is a current go-to-market. But if they actually increase those ads up closer to six minutes an hour, then it could obviously double that.

You're talking about $6 billion of potential revenue coming in through ads. And by comparison, traditional linear TV is showing something like 16 minutes per hour of ads. Now, we don't think Amazon wants to take it anywhere near linear, but the point is, they don't need to to make a lot of money.

And then the other thing that we talk about is the incremental margins on this are likely to be quite high for Amazon because, in many cases, they've already paid for the content. You know, they either own it outright or they've licensed it to basically provide it to Prime users. And so we don't think that there's a lot of incremental cost as they start to show ads and generate ad revenue in here.

It's obviously very opaque. They don't talk a lot about how they structure any individual deals, and I'm sure a lot of them are very unique and different deal by deal. But I think, in a broad context, we think the incremental margins here are quite high. So you know, if they can get, over time, up to something like $6 billion at an 80% incremental margin, you're talking in the neighborhood of $5 billion of incremental operating profit to the company if we're right, and they can scale this over the next few years.