Adam Levy

The Motley Fool

Amazon's Fire TV platform is ... on fire.

About 65 million Americans use the streaming sticks, set-top boxes and smart TVs containing Amazon's television operating system, according to a recent estimate from eMarketer. That's about 9 million more users than the research firm predicted last year.

Amazon is also making progress toward catching up with Roku, the market leader in the United States. Fire TV users are expected to grow at an 8.1% rate over the next four years, faster than Roku's 6.7% expected growth rate. Importantly, the growth of both already-popular platforms is outpacing the rest of the industry.

That's particularly notable as streaming becomes a primary source for video entertainment in more and more households in the United States. Roku and Amazon are poised to benefit while others struggle to keep up.

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The big get bigger

Amazon and Roku account for nearly 70% of installed streaming devices in the United States, according to Parks Associates. Roku still owns a healthy lead over Amazon in terms of installment base and users in the U.S., one eMarketer says will persist.

As their combined growth continues to outpace that of the rest of the industry, the two are creating a duopoly in streaming similar to the duopoly that Google and Facebook have in digital advertising. Even in that industry, though, the two leaders combine for just about 60% of the market. Amazon and Roku's combined dominance has the potential to be much stronger.

A duopoly has big implications for both media companies and advertisers as more money flows into streaming.

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What it means for media companies

Media companies that want to offer a streaming service must work with Amazon and Roku in order to succeed. That gives both companies significant leverage in negotiating things like revenue shares for subscribers or advertising inventory shares.

Amazon has notably flexed its muscle over the last year. It started requiring all ad-supported services to provide it with 30% of their ad inventories last fall. Roku takes the same cut. Meanwhile, it managed to settle a dispute with Google to bring YouTube and YouTube TV to the Fire TV platform despite an intense rivalry between the two companies.

Their strength is notable as part of the upcoming launch of Apple's streaming service Apple TV+. One of the big goals of Apple's new service is to bring consumers into its Apple TV Channels ecosystem, where it can sell additional subscriptions. But Apple couldn't offer a streaming service without supporting the most popular connected TV platforms, even if it means ceding control and sacrificing some of the strategic benefits.

For smaller companies, it could mean having to pay more to play. Both Roku and Amazon have their own content that they might prefer to promote to their users over another company's content. Placement in the Roku Channel, for example, might come with additional costs for those media companies compared to a user streaming the same content in a stand-alone channel.

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What it means for advertisers

Advertisers looking to shift ad budgets from traditional television to streaming video don't have too many options outside of Amazon and Roku for targeting customers at scale on TVs. There are a few – like YouTube and Disney's Hulu – but an increasingly large share of premium digital video ad inventory on televisions will fall into the hands of Roku and Amazon. That's even more the case as their respective first-party ad-supported services, The Roku Channel and IMDb TV, increase in popularity.

That's not necessarily bad for advertisers. Fewer ad platforms mean lower personnel needs and a simpler ad-buying strategy. Meanwhile, the targeting capabilities of Amazon are incomparable considering the data it collects on consumer's shopping habits. Roku's targeting isn't too shabby either, as it focuses on helping marketers target audiences they can't reach elsewhere.

But those efficiencies have downsides for advertisers as well. Amazon and Roku will be able to command premiums for their ad pricing compared to smaller competitors due to their broader reach and better targeting capabilities. This has played out with Google and Facebook commanding premiums compared to their competitors.

While Amazon and Roku will still have to produce positive ROIs, they'll be able to create much more efficient markets for ad spending than smaller competitors with less inventory and demand. Marketers hoping to capitalize on the digital video ad market producing lower costs and higher returns for the same advertisements might not have very many opportunities with Roku and Amazon.

Of course, that's great for Roku and Amazon, which will benefit from higher ad revenue. Higher average ad prices may also contribute to further control over media companies, especially those relying on ad-supported streaming. Roku or Amazon could negotiate for a higher percentage of revenue if their ad platform is the contributing factor to increased ad prices.

Meanwhile, the continued dedication of media companies to releasing services and supporting the Roku and Fire TV platforms means consumers will continue to flock to the platforms, creating a virtuous cycle.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares), Amazon, Apple, Facebook, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Apple, Facebook, Roku, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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