Nearly a year ago, Latticework.com featured an insight from Gary Brode on the paradigm shift of Amazon Prime.  Today, it is wonderfully clear that Gary was spot on and we’re watching increasing untapped pricing power and an expanding moat:

February 3, 2017 (source)

Amazon’s investment in video content appears to be paying off.

 

According to The Wrap, Amazon CFO Brian Olsavsky said the number of hours viewed on Amazon Prime Video doubled in 2016 as compared to 2015.

 

“Well, ultimately, I’ll step back and say one of the main things we look out on Prime Video is customer usage patterns and in 2016 we had a doubling of Prime hours for video, music and reading. So we’re happy with the engagement that customers have,” Olsavsky said during yesterday’s earnings call, according to a Seeking Alpha transcript.

 

Later in the call, Olsavsky offered more detail on what Amazon is expecting out of its content spending and its recent international expansion of Amazon Prime Video.

 

“We’re certainly spending ahead of the value of the engagement right now, but it’s a good sign that it’s building,” said Olsavsky. “As I said, it’s very much a fixed expense game, especially with original content. That fixed amount can go up or down, but the ability to amortize it over a large population is what we’re looking for.”

 

“So, we see a double benefit of the global Prime Video program, again both to amortize the investment in original content but also to show that original content to more and more people, because we think it’s done really well. We think it’s won a lot of awards and we’ve worked with some—again some great, talented people. And it’s our ability to scale that and to amortize it over a much larger customer base, which will help us in the future,” he added.

 

Amazon’s international aspirations could require the company to expand its content budget.

 

Jefferies analyst Brian Fitzgerald estimated that Amazon’s video content budget for 2016 was between $4 billion and $5 billion, but that the cost of international expansion to nearly 200 countries could drive that total up another $1 billion to $2 billion in 2017.

 

That would bring AMZN’s annual content expenditure in line with Netflix, which disclosed ~$6B content budget on P&L basis for 2017. AMZN management highlighted on the last earnings call that content was among the top three categories in which the company was, and planned to continue, investing. On the call, CFO Oslavsky said that ‘video content and marketing associated with that’ was nearly doubling Y/Y in 2H16,” Fitzgerald said in a research note.

Gary Brode’s initial observation, from early 2016:

Amazon Prime started as a way to pay a yearly fee and get free shipping from Amazon.  It was a great deal, but what Amazon started to do was offer their Amazon Prime customers Amazon Streaming which had music and books and video as a way to tie consumers to the Amazon site. What makes Amazon Prime completely different from anything else is that in everything else the programming is the product that they use to sell you commercials.

 

If you’re watching CBS, they cram 16 to 18 minutes of commercials per hour down your throat and their view is that in exchange for watching the product — their show —  they are going to annoy you for about a third of that time.  You put up with the annoyance in exchange for getting the product.  Netflix says, ‘Okay, we’re not going to annoy you.  Pay us a fee and we’ll give you the program.’  Amazon Prime is different because Amazon is the product.  And the program is actually the commercial.  

 

(pause) 

 

If you think about it: They don’t charge you for the show. The show ties you to Amazon.  By watching the show, that’s actually the commercial for Amazon Prime, which is the gateway into Amazon.  What they’ve done is they’ve said, ‘The program is not the product and it has zero value. We’re going to give it away for free.  Just don’t leave our site.’

 

It’s completely changed things.


Source: Gary Brode on the Paradigm Shift of Amazon Prime

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