Amazon is no threat to Netflix – video simply uncovers super buyers

For years the success of Amazon Prime has been directly translated by many analysts into success in OTT video, but a report out this week throws that into some serious doubt. Internal leaks ran this week by Reuters suggests that its TV series and original content only attract an audience of 26 million. It has about 90 million Amazon Prime members, most of them in the US, suggesting that only 30% of Prime members actually watch any of the video.

It seems that Amazon thinks of video more as a cost center than as a profit center and talks about how much it has had to spend to create original programs like the Man in the High Castle, and how many Prime members this has drawn in and looks at the upside of what they might spend on Amazon.

Faultline Online Reporter has consistently suggested that because of a lack of devices for easily watching Amazon on the large TV screen in most homes, and the scarcity of top quality content, that no more than 40% now, slowly rising to 50% and then on to 60% of Prime customers actually view videos, and instead simply use Prime for delivery. In Germany some observers had Amazon ahead of Netflix simply because of the high number of Prime customers there, while our forecast showed it quite accurately lagging – but perhaps not lagging enough.

Up until the end of 2016, when Amazon said it would launch Prime in 200 countries (100 for Amazon Video), Amazon at that time only had around 4 million video viewing customers outside of the US bringing the total to around 30 million globally. Now going forwards it would be tough to put a number on it because Prime has become a slightly different offering in each country at a slightly different price and is not precisely the same as the US service which gives access to about 30% of all Amazon Video for free, and also gives free package delivery – sometimes same day free delivery. In some countries there are other free services such as online music subscriptions.

The report shows that video is now costing Amazon around $5 billion a year, and this has to come out of the Prime budget, which even at close to 100 million people and prices around $100, comes to $10 billion – so half of that money goes simply to pay for the video people watch, not for the delivery of packages.

The leaked materials show the internal accounting around this, and one example is the famous Amazon original “The Man in the High Castle,” an alternate history where Germany won World War II. This had 8 million US viewers during 2017, and cost $72 million in production and marketing costs. And it dragged 1.15 million new Prime subscribers into the service.

The way Amazon calculates this is to attribute the sale to the first program that the viewer streams on Prime Video, so if someone bought it to watch The Man in the High Castle, but watched something else first, it would attribute the sale to another program. Interestingly one person we know has been a Prime member for 8 years and watched the first episode of The Grand Tour last year as their first stream. Presumably Amazon understands a program that hasn’t been made yet cannot be the reason for someone subscribing to Prime?

So in the case of the Man in the High Castle, there remains Prime revenue left over to pay for actual package delivery services – but in that example, not much – and that’s one of the best examples. The documents also revealed that Prime members spend far more buying things on Amazon than non-Prime members, which is the reason for attempting to upgrade everyone. Prime members spend an average of $1,300 on Amazon a year, double the spend of non-members.

You would have thought that this might place a limit on Amazon’s ability to grow this business, but of course that limit is how fast it can grow its core business, if this is just considered a “reward” for promising to spend double through Amazon.

When Netflix flipped from charging for DVD delivery and giving online video for free, to charging for both, it almost scuppered its business. We have said in the past that Amazon needs to go through the same pain to turn online video into paid online video. Under its current model Amazon does not have to do this, as it remains a reward for online spending forever. But we’re not so sure. Video “per se” has to move to online, so while Amazon sells DVDs and physical music, this is okay, but once these are entirely online, if Amazon does not charge directly for them, it will have lost two of its key markets entirely. So at some point it has to change online video from being free, as a reward, to being paid for, and take it out of Prime. Under its current strategy however it might do that much later.

There must also be a benefit in keeping long term Prime customers, from the online strategy – when some people would have left – no longer buying so much online from Amazon. There is no indication in the leaked documents to say how Amazon treats this, but it must be clear to everyone, that if Amazon can spend $5 billion on video out of a $10 billion Prime budget, that delivery costs nothing like what Amazon is currently charging. When Prime members realize they are paying double for delivery it may lead to a high level of cancellations. On the other hand Amazon economies of scale probably give it sufficient extra margin that customers will get worse deals elsewhere.

The motoring series “The Grand Tour,” featuring the old Top Gear team from the BBC, achieved 1.5 million first streams from Prime members worldwide, bringing the cost down to $49 per subscriber. But apart from the Grand Tour and The Man in the High Castle, few other originals appeared to be cash positive.

Under this strategy, in no-way can Amazon ever catch up with Netflix and should perhaps not be so aggressively compared to it, at least until Amazon charges separately for a streaming SVoD subscription.