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Amazon: Betting Big On Entertainment

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon's (NASDAQ: AMZN) media business is increasingly becoming an integral part of Amazon's technological empire. However, the company reveals little in terms of the number of subscribers the company's Prime service managed to rope in. While the company's customer-centric focus is unparalleled, many investors have been skeptical of the company's big media investments as the company's big bets on digital video and music puts it face to face with very dominant players including Apple (NASDAQ: AAPL)Google and Netflix.

Amazon is investing heavily on originals 

Amazon is investing heavily in building out more content through its movie-making unit, Amazon Studios. And the company just recently chose 5 shows based on customer reviews to make full seasons from an array of 14 pilot episodes of comedy and kids TV shows. And Amazon Studios has around 24 movies in the pipeline, all of which will be chosen by the audiences of Amazon and its subsidiary, LOVEFiLM. 

Amazon is investing in content geared towards kids, a space that has been heavily dominated by Disney and also DreamWorks Animation. Amazon does realize the importance of having a family-friendly offering, and thus the original content shows which will tap into a much younger consumer demographic.

In addition, Amazon's Hollywood Footprint, IMDB will aid substantially in the company endeavors of being a prominent Internet TV outlet. IMDB can serve as a massive promotional tool by notably displaying the wares of Amazon Studios as well as link users to buy on-demand services on Amazon Instant Video. IMDB routinely gets more than 160 million unique visitors to its platform each month. And more importantly, it is the gateway for gathering information, read reviews, and watch trailers from not only Hollywood, but from across the world. IMDB's database and large group of regular users, represents a major organic marketing medium for Amazon.

Newer licensing deals

Amazon has large amounts of data from its transactional video offerings as well as through the DVD retailing business which has enabled the company to understand and choose what types of video content consumers want to watch. Video streaming rival, Netflix used the data from its massive subscriber base to license content as well as decide what type of original content it will commission. 

Amazon has been continuously expanding selection for its Prime Instant Video as the company signed new licensing deals with NBCUniversal, CBS, FX, PBS, Scripps Networks Interactive, A+E Networks. The addition of these popular shows to Amazon's content library will enhance its transactional business under Amazon Instant Video which now has more than 150,000 titles. In addition, it also enhances the company's value proposition to end users for the Amazon Prime subscription which now has more than 40,000 movies and TV episodes for Prime members to stream on.

Why the big investments

The Europe-based LOVEFiLM is already a leading subscription video provider in the region with more than 2 million subscribers, and a content-base of more than 70,000 titles. However, LOVEFiLM has been surpassed by the increasingly dominant player in the space, Netflix (NASDAQ: NFLX) in the region. However, LOVEFiLM will enable Amazon to market and distribute its original shows throughout Amazon's main locations in Europe, which in turn will expedite the subscription revenue from Amazon Prime.

In 2012, Amazon's sales from the U.K. and Germany made up 25% and 33% of the company's total International sales, as a result, LOVEFiLM's positioning in these two countries will aid Amazon significantly to get more subscribers to watch original shows from the Prime service for an annualized fee of $79. 

While the TV Shows might not be big budget or might not be of the same quality as the production of competing firms like Netflix, Amazon’s investments in adding more video content should drive down the churn rate of the Prime service in the future.

Amazon’s prime subscribers are doing a lot of cross-shopping on the company’s massive platform. When customers take on the Prime Service, the customers tend to shop a lot more from Amazon to take advantage of the unlimited 2 day shipping service which leads to more incremental revenue for Amazon from its retail operations as well as the Third Party business of the company. 

Tablet Strategy

Amazon's MP3 offering has been updated to enable Apple users of iPhone and iPad to purchase digital music from Amazon’s music catalog which stands at a very respectable 22 million songs. Amazon has been ramping up its footprint in the digital music area to supplement its tablet offerings. Amazon notched up a market share of 22% in the digital music download space in the U.S., according to the NPD Group.

However, Apple's iTunes still leads heavily with a 63% piece of the pie, largely due to the first moves status and the 500+ million registered users on iTunes. However, Amazon has been investing heavily to enhance its digital music footprint and it is paying off, as the company had only 7% market share back in 2008, according to the NPD Group.

Apple's iTunes still heavily controls the market for home digital videos, in both electronic-sell through (EST) and Internet video-on-demand (IVOD). According to the NPD Group, Apple's share of EST and IVOD stood at 67% and 45% in 2012, whereas Amazon stood at 10% and 18%.

So it is rather evident that Amazon's big investments in content are to expand the breadth of its ecosystem to get more tablet owners to buy more content. And just recently the company announced the expansion of its Appstore in ~200 countries to ramp up its content sales, and that the Kindle Fire will be sold in more than 170 countries. Amazon's customer list of more than 209 million provides the company a sizable advantage due to its scale and installed user base.

The Bottom Line

Jeff Bezos himself addressed the investor concerns regarding the company's big investments, and stated that the company's long-term approach still holds true. And Amazon's media head, Bill Carr, stated that the firm will be looking to sign more exclusive shows down the road, which will lead to more incremental investments. While the return from the recent entertainment bets may not have materialized right away, in the long-run these investments widens the company's durable competitive advantage by appealing to more customers. 

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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