AMAZON DEVELOPING A FREE, AD-SUPPORTED VERSION OF PRIME VIDEO, SOURCES SAY

Amazon is developing a free, ad-supported complement to its Prime streaming video service, according to people familiar with its plans. The company is talking with TV networks, movie studios and other media companies about providing programming to the service, they say.

Amazon Prime subscribers pay $99 per year for free shipping but also access to a mix of ad-free TV shows, movies and original series such as "Transparent" and "The Man in the High Castle." It has dabbled in commercials on Prime to a very limited degree, putting ads inside National Football League games this season and offering smaller opportunities for brand integrations.

A version paid for by advertisers instead of subscribers could provide a new foothold in streaming video for marketers, whose opportunities to run commercials are eroding as audiences drift away from traditional TV and toward ad-free services like Netflix and Prime.

It would also escalate the war for video audiences that's already raging among major media and tech powers. Facebook this summer introduced Watch, a hub for video that includes commercial breaks. Apple, whose broader plans are far from clear, last week outbid Netflix for a new series from Jennifer Aniston and Reese Witherspoon.

An Amazon spokeswoman did not provide comment by press time. (UPDATe: After publication, an Amazon spokeswoman said the company has no plans to create a free, ad-supported version of Prime Video. The spokeswoman also said the company would not comment on negotiations with publishers and other content owners, but said Amazon is not "currently looking at" ad revenue sharing opportunities with them.)

To get its new effort off the ground, Amazon may share both audience information and ad revenue, even linking payments for content to the number of hours people watch it, executives familiar with the conversations say.

"Amazon is talking about giving content creators their own channels, and sharing ad revenue in exchange for a set number of hours of content each week," says one of the executives, speaking on condition of anonymity to discuss a project that Amazon has not announced.

"Amazon is taking a smart approach," one top ad agency executive adds. "The only way to strike these deals is to provide a revenue share and share data insights."

Amazon is already expected to spend almost $5 billion on content this year, according to Wall Street analysts. It has moved its Amazon Studios from Santa Monica, California, to the Culver Studios lot in Los Angeles where "Citizen Kane" was filmed; struck deals with people like Robert Kirkman, the creator of "The Walking Dead"; and signed up for a show directed by Seth Rogen. But the new service could simultaneously help build Amazon's sales of advertising and everything else under the sun.

Prime members are Amazon's most coveted consumers, because they buy more often and spend more money. And movies and TV shows are a key driver of Prime sign-ups. A free version could be the promotion that Amazon needs to hook more Prime subscribers.

"Amazon is doubling down on its own media and content, and thinking about how to make that available," one advertising exec says, speaking on condition of anonymity. "The way to do that is a freemium model."

For the ad-supported service, Amazon wants to dive into back catalogs of TV and movie studios, looking to beef up its children's programming, for example, one TV industry insider says. It is also going after lifestyle, travel, cooking and other shows that are a good fit for an e-commerce platform.

Amazon has been slowly building out its ad capabilities, starting to let brands pay for video on their product pages and developing technology to serve ads beyond Amazon.com. But marketers will pay high prices for video ads in entertainment programming—including traditional TV, despite the long-term ratings trends. The question now is whether Amazon, so dominant and disruptive in many other areas, can make a big mark in ad-supported video too.

"Amazon needs broadcast-quality ad inventory," says an ad agency executive, "if it's going to attract the kind of upfront dollars that flow to television and compete with networks."