How an Hit TV Program Contributes to Amazon’s Profitability

Last week Reuters reported data from internal Amazon documents that for the first time provided insights into viewership of the company’s original TV programs and their contribution to creating new Prime subscriptions. Below I’ve done some additonal math using separately reported information to calculate how profitable at least one of Amazon’s original programs could be.

Last October, Fortune reported research from Consumer Intelligence Research Partners indicating that Amazon Prime subscribers spend an average of $1,300 per year compared to an average of $700 per year that non-Prime subscribers spend. (Note, back in Fall, 2016, Morgan Stanley said that according to its survey, Prime subscribers spend nearly $2,500 per year, vs. $544 for non-subscribers). For the purpose of my calculations, I just used the CIRP estimate of $600 incremental spending per year by subscribers.

The Reuters article notes that the Amazon program “The Man in the High Castle” delivered 1.15 million new Prime subscribers worldwide. So, multiplying this by the incremental annual spend of $600 yields $690 million in incremental revenue from these new subscribers. Amazon’s North American e-commerce operating margin in 2017 was approximately 2.7%, so the operating profit on the incremental revenue would have been around $18.6 million (this is rough, because some of the incremental subscriber spend came from international where it is undoubtedly lower and also where Amazon actually still loses money on an operating basis).

In addition to the annual incremental spending benefit, those 1.15 million new subscribers also spent $99 to belong to Prime, which would be another $114 million in annual revenue. The operating profitability of the membership fee is hard to calculate given all the different benefits and their costs, but assume it’s 50%, so the profit would be around $57 million. In total that would mean “The Man in the High Castle” delivered year one profits of $75.6 million vs. its cost of $72 million, or $3.6 million net profit, a 5% margin. But keep in mind this is only year one; as long as Amazon retains these 1.15 million subscribers, the profitability multiplies. In addition, there are further revenue streams derived from Prime members such as add-on subscriptions to video services through Amazon Channels.

Admittedly, the above math is a little rough, and it should also be noted that Reuters’s own reporting hasn’t been independently verified. Still, Amazon CEO Jeff Bezos has been extremely candid about the benefits of video to Prime. In an interview with Recode in mid-2016 (see 37:32 cue point), Bezos said that “When we win a Golden Globe, it helps us sell more shoes,” adding that both Prime’s free trial conversion and annual renewal rates increase when subscribers watch video. He actually cited “The Man in the High Castle” as an example of programming that works really well, no surprise.

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Amazon Prime Video By The Numbers

Prime Numbers

Reuters obtained audience numbers for Amazon’s Prime Video subscription service. According to the internals, by early 2017 Amazon Video had drawn more than 5 million people into the Prime loyalty program, and about 26 million people overall were watching content on the platform. Amazon now spends $5 billion per year on original content, as entertainment has proven a powerful on-boarding ramp to Prime membership and a virtuous cycle of consumer spending. Those video numbers also point to why Amazon keeps its most valuable content ad-free behind a subscription paywall, since it isn’t about recouping ad revenue for the studio investments. It’s about the lifetime value of a Prime subscriber compared to a mere logged-in Amazon shopper.

Fickle Friend

Facebook is offering to fund news publishers’ shows for its Watch video hub. But publishers, fed up with Facebook’s tendency to flip-flop on such offers, are proceeding with caution, WSJ reports. Facebook pulled a similar stunt with its Live section, spending $50 million to fund year-long projects for news pubs, and then failing to renew those deals the following season. Still, publishers are willing to take the risk if it means access to Facebook’s huge audience. “I think anytime Facebook is willing to pay, we’re more willing to play,” said a publishing exec. “The problem is that when these pilot programs expire, there is still no clear revenue channel. Then you’re stuck.” More. Related: The chairman of NBC News slammed Facebook, AdAge reports. “You can’t have a relationship with them.”

Asleep At The Wheel

Snapchat’s shares sank almost 5% Thursday after pop singer Rihanna called out the app for running a tasteless ad that asked users to decide whether they wanted to “slap Rihanna” or “punch Chris Brown.” Snapchat removed the ad, which ran inside a mobile game on the platform, and chalked it up to an error by its review team, which is supposed to block any content that violates its policy banning“shocking, sensational or disrespectful” content. “We are so sorry we made the terrible mistake of allowing it through our review process,” Snap said in a statement. “We are investigating how that happened so that we can make sure it never happens again.”

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Amazon will soon distribute ad-supported streaming channels

Amazon’s Channels program has been a big hit for TV networks and digital publishers with subscription video streaming products. Soon, Amazon wants to open up advertising as another form of revenue for media partners that have ad-supported streaming apps.

Speaking at Digiday’s Future of TV Hot Topic last week, Rich Au, head of Amazon Channels in the U.S., said Amazon will start offering ad-supported streaming channels later this year. While he did not provide a specific timetable, Au pointed to how Amazon already supports ad-supported channels in Europe, including a partnership with Discovery that includes access to the company’s linear TV feeds in European markets. Amazon will open up similar possibilities in the U.S., he said. (Amazon stressed that this is a distinct offering from the existing Amazon Channels program, which focuses on subscription streaming channels.)

In the U.S., the Amazon Channels program offers subscriptions to top networks, including HBO, Showtime and CBS. Advertising could substantially benefit streaming networks such as CBS All Access that already offer ad-supported tiers on their own. Right now, anyone subscribing to CBS All Access through Amazon can only access the app’s $10 monthly ad-free tier. When Amazon opens up access to the app’s $6 ad-supported tier, CBS has a chance to create a second revenue stream from its Amazon partnership.

It’s hard to understate the impact the Amazon Channels program has had on the growth of subscription streaming services in the U.S. When NBCUniversal launched its now-defunct comedy streaming service Seeso in January 2016, Amazon accounted for upward of 60 to 70 percent of total subscribers, said Evan Shapiro, the former NBCU exec who launched Seeso. By the time Shapiro left NBCU in May 2017, Amazon Channels accounted for 40 percent of total subscribers, Shapiro said.

“That was because over time, we found organic [search] traffic migrating to the native platform,” Shapiro said. “But Amazon’s growth didn’t slow — and the best part of the Amazon Channels product was that the churn is substantially lower than others.”

Two other Amazon Channels partners at TV networks corroborated the program’s impact on their subscription apps, privately telling me that Amazon Channels contributes anywhere from 25 to 45 percent of total subscribers.

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TiVo: 20% of time spent consuming video

According to findings from entertainment technology and audience insights specialist TiVo, the average global viewer spends 4.4 hours each day watching video. Coupled with the global average of 28 minutes spent each day searching for content to watch, that is nearly five hours per day of video engagement, which amounts to 20 per cent of daily life, building à la carte entertainment experiences that work best for them.

The company’s annual multi-country Global Consumer Trends study explores viewer engagement with the video content, services and devices that shape the evolving consumer entertainment experience.

The study also found that about 90 per cent of households are currently paying for traditional pay-TV service. However, more than 60 per cent are also subscribing to streaming video services such as Netflix, Amazon Prime and Hulu.

In the US, more than 50 per cent of pay-TV subscribers have been with their service for four years or more. Subscribers with the shortest tenure are also the least dependable: more than 10 per cent of those who have subscribed to cable for a year or less say they’re very likely to cut the cord in the next six months.

It’s not just the amount of content that has exploded in the last few years. People now have more screens than ever at their disposal to watch their favourite videos. Nowhere is this truer than in Latin America, where 50 per cent of all viewing now takes place on a digital device other than a television set, according to the study. By way of comparison, viewers in the US say that more than 75 per cent of their video consumption still occurs on their TV.

“Consumers today are acting as their own aggregator, piecing together what they need from a variety of video service and device combinations to suit their individual needs,” said Paul Stathacopoulos, vice president, Strategy, TiVo. “Success in this new environment will not be about a single content source monopolising the living room, instead it will be about adapting the business model to deliver value, integrated services and personalisation to meet the evolving consumer needs.”

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Advertisers, Get Ready To Go Over The Top

by Bettina Hein

This will be the year the cable TV bundle dies a sudden death.

I know, the “TV is dying” cry has echoed time and again. But as audiences continue to consume content across online video, over-the-top (OTT) and TV, there will be increasing pressure for them to converge into a single integrated advertising buy – one that offers marketers an unparalleled combination of reach, targeting and audience data.

In the coming months, major online video and OTT providers, such as Google, Facebook, Amazon and Apple, will aggressively expand their streaming offerings to retain audiences and better serve advertisers. This will force at least one of the large cable TV providers to make a significant business model shift, such as developing an affordable streaming offering that is highly configurable to viewers’ tastes.

It’s been nearly a decade since Netflix and Hulu launched their initial OTT streaming services, just as many millennials were graduating from college and keen to avoid cable bills. This generation has led the way in the cord-cutting phenomenon; as of July 2016, nearly 40% of US millennial households relied solely on internet streaming and broadcast.

The OTT pioneers have continued to drive innovation, and as their market share grows, advertisers are taking serious notice. Roku’s recent partnership with media-buying behemoth Magna, which represents major brands such as BMW and MillerCoors, is a signal that mainstream advertisers are embracing the enhanced targeting offered by digital television, and they are driving those investments by shifting dollars away from linear TV.

Additionally, viewing options have proliferated: Amazon and Apple – neither of which have typically participated in the advertising supply side – are exploring ad-supported models for their robust streaming content offerings, Instant Video and iTunes. HBO Now has led cable networks in circumventing cable providers with direct OTT services, and traditional telecoms like Verizon have sought to bolster internet revenues through acquisition.

Of course, no one would expect the walled gardens to merely watch the OTT race stream by. Google, Facebook and Twitter have spurred shifts in viewing trends – as the distinctions between professionally produced and social content have eroded – and have built platforms designed to keep viewers consuming content within the walls for as long as possible.

The platforms spent much of 2016 addressing a key weakness in current OTT offerings: live viewing of popular events, ranging from presidential debates to Thursday Night Football and the Academy Awards. As the walled gardens’ live video capabilities become increasingly sophisticated, they’re creating more competition for linear networks by opening the distribution doors to brands and creators.

All indications point to social networks expanding heavily into OTT in 2017, with investments designed to appeal to consumers and advertisers alike. In the past few weeks, Google has revealed plans to improve YouTube ad performance by incorporating search history into targeting, while the financial community has openly speculated about an impending YouTube television service launch.

In the meantime, Google is partnering with broadcast networks seeking to get in on the streaming action and monetize their traditional TV content, like CBS’s forthcoming YouTube Unplugged live stream. While Facebook has kept its strategy closer to the vest, it’s reportedly building its own streaming TV app to encourage longer video viewing, and I expect moves from Facebook later this year – perhaps via an acquisition of an established OTT pure-play provider.

So what does this all mean? Viewers will increasingly take advantage of expanded live and traditional programming within their OTT platforms of choice, and cable providers will be forced to respond with a survival mechanism: the rollout of new streaming packages to counteract the drop-off in linear viewership and cable subscriptions.

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Amazon to make more video revenue than Netflix in 2018

Amazon will overtake Netflix to generate more over-the-top (OTT) video revenue in 2018 thanks to its “growing array of ways to pay for video,” according to Ovum predictions.

The research firm said that Amazon’s combination of subscriptions, digital rentals, electronic sell-through and bundles of TV apps will see it generate US$5.8 billion in video-related revenue next year.

It expects Netflix, which led the pack in 2017, to generate US$5.3 billion in revenue through its subscription-only model.

“Arguably, the e-commerce giant is ‘cheating,’ as Ovum’s estimates count fees from Amazon’s ever-growing Prime bundle. But maybe that’s the point. Rules are meant to be broken and Amazon is the most daring offender,” said the Ovum report.

It also claimed that despite the hype, Netflix still won’t have a majority of OTT video subscribers in at least 19 countries by the end of 2018, with local providers to hold the top spot in various markets – such as Ipla in Poland, Showmax in South Africa and Iflix in Indonesia.

Among its other consumer and entertainment service predictions for 2018, Ovum tipped Apple to launch a new premium OTT video offering, initially in the US, as its share of US online video revenues via iTunes sales declines to less than 4% in 2018.

It also said it expects Facebook’s ad-supported Watch video platform to go international next year, but to have “minimal” global impact.

“While we expect Watch to roll out internationally next year, Facebook’s share of global AVOD revenue will remain negligible in 2018,” said the report.

“Facebook must attract compelling local content, refine its video ad experience, and offer more robust and reliable ad metrics before it can truly compete with YouTube and other premium AVOD platforms for consumer attention and advertiser spend.”

Overall, Ovum expects Netflix, Amazon, YouTube and other online-only services to account for 18% of total paid and ad-supported TV and video revenues next year and 60% of growth.

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Could 2018 Be The Year Of The OTT Breakthrough?

Consider, next year Netflix will spend as much as $8 billion on content, potentially more than any other media or technology company.

Amazon will continue its own investment in OTT, and will be given a signal boost thanks to its high-profile simulcasts of NFL “Thursday Night Football,” along with the Amazon Video app addition to Apple TV.

AT&T, in its latest earnings report, said streaming video subscribers jumped by 300,000 subscribers, while its traditional pay-TV customer base had a net loss of 90,000 subscribers.

Meanwhile, according to an FCC filing, AT&T is developing an Android-powered and DirecTV-branded OTT video hub that appears likely to be released in short order. Assuming AT&T’s acquisition of Time Warner is approved by regulators, the company will have a vast swath of content, including HBO, to entice new customers to start streaming.

If you’ve been watching the World Series over the last week, you’ve certainly noticed it was “presented by YouTube TV,” with a reminder that you could watch the games without a cable subscription through the service.

Hulu is also launching its bundled OTT video service.

CBS plans to significantly increase its content spend on original programming for its CBS All Access service, and will be rolling out a sports streaming service in the coming months. Disney will launch an ESPN streaming service sometime next year, though the details of what sports it will include remain under wraps for now.

2018 feels like a tipping point. Every major television company will have a dedicated streaming service by the end of next year, while the powerful technology trio of Google, Amazon and Netflix continue to invest and expand their subscription video offerings. And technology will make it easier than ever to watch OTT video on our TV sets, while mobile phones continue to feature screens well-suited to watching video.

For advertisers, these products present new opportunities: to advertise on sports events that may have a loyal following, but are not big enough to air on traditional TV. To advertise on new video bundles with a largely millennial consumer base. To use the scale of a company like Google or AT&T to reach key constituencies not served well by existing video products.

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Despite hiccups, live streaming is moving to the next level

The critics were out in force for Amazon’s inaugural live football stream last week. However, growing interest in live streaming online and a renewed focus from video platform providers on scalability should deliver TV quality and TV scale in the not distant future.

Amazon, Yahoo deliver mostly satisfying experiences

Amazon’s first Thursday night football live stream did not go off without a hitch. Some struggled to join the Chicago versus Green Bay stream at the beginning of the game. Others had their viewing interrupted by buffering issues. Some viewers of the NFL game between Jacksonville and Baltimore streamed live by Yahoo on the previous Sunday reported similar problems.

However, the truth is that in both cases most people that watched the games online enjoyed them as the NFL intended. I watched both and completely forgot how the games were coming to me. So much so that I grew bored with the Jacksonville game and gasped at the foul on Davante Adams in the Green Bay game.

Not just sports driving live viewing

It is not just sports that are driving the growth of live streaming online. According to Freewheel, ad views during live streamed news grew 150% between Q2 2016 and Q2 2017. Ad completion rates were also unusually high, 96%, indicating that viewers are very engaged in the content they are viewing. Again, this is another strong indication that the quality and overall experience of watching live online news is meeting the expectations of viewers.

More live streaming providers coming

Expect the number of live streaming services to continue to increase. A 2016 survey of online video service providers and those planning to launch service within the next year found 44% said their service provided live events. 30% said they provided a mix of live and linear. Live was by far the largest class of video content provided, beating out on-demand content providers handily.

This sharp focus on live streaming by video providers speaks loudly to the state of live streaming technology. They are confident enough in the ability of the Internet to deliver that they are willing to bet their business on it.

Video platforms take on the problems of scale, quality

That said, there are still challenges in delivering live streaming video online. One major video platform provider freely admitted to me at IBC in September that the Internet cannot sustain Super Bowl-sized audiences today. Other live streaming issues need solutions as well. For example:

The action in live streams typically lags far behind the actual event (latency)
Two people watching the same live event online typically see the action occurring out-of-sync with each other
Video start-up time is frequently far longer than changing the channel on broadcast television.
In each case, however, I saw companies at IBC offering solutions to each of these problems. In other words, the Internet is doing what it has always done: as problems arise companies find solutions. I, for one, do not doubt that the Internet will deliver Super Bowl-sized audiences when the viewers demand it.

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Is Amazon’s video strategy working?

Amazon is taking a strikingly different approach to Prime Video than rivals such as Netflix and Hulu are with their services. Rather than bundle content together into a single offering, it is providing most of the video in channels that customers must subscribe to separately. It is working very hard to build up the number of channels available to cover every niche and content genre a viewer could possibly want.

There are already 120 content services available through Amazon Channels. The company continues to press to expand that list. It is rumored to be in negotiations with “dozens” of smaller cable channels to buy them. TV channels providing content with unencumbered rights (rights that aren’t locked into exclusive distribution agreements) are of the most interest. Amazon will be able to launch them quickly to a global audience as part of Channels.

Amazon is not just waiting around for other providers to fill out the content available through Prime Video. It is working with companies directly to fill out important genre categories. For example, animated content creator Genius Brands International is partnering with Amazon in the creation of a channel offering targeted at children. Kids Genius Cartoons Plus! will be available Thursday to Amazon Prime members for $3.99 per month. Genius properties such as Baby Genius and Thomas Edison’s Secret Lab will be available as well as non-Genius shows such as Inspector Gadget and Carl Squad.

Building the library of included content with originals, sports

Amazon recognizes that a large collection of content available as part of a basic subscription is critical to success. It gives customers a no-commitment reason to go to the video portal. Once there, Amazon can use its marketing muscle to get them to subscribe to other content. That is why it has committed to spending $4 billion this year on original content. It is spreading the investment around in genre’s like comedy (The Tick), drama (Mozart in the Jungle), and Crime (Bosch.)

It is also plunging into the world of premium sports. Amazon members will be able to watch ten Thursday football games this season, starting this week with the Bears versus Packers. This is the first time Amazon has streamed live content as part of Prime Video membership. It will be a test of the home-grown streaming platform that Amazon uses, as live streaming continues to be challenging for providers.

Is Amazon’s strategy working?

Amazon doesn’t provide any specifics on how many people are watching the content it provides through Prime Video. Luckily, there are other data sources we can draw on to assess how well it is doing.

Last year, Clearleap reported that 75% of Amazon Prime members say they watch video available through the platform. Most, however, see Prime Video as a nice bonus, not the main reason to subscribe. Still, if most of the 66 million Prime members are using the video apps that is certainly a big win for the company. Unfortunately, engagement still lags well behind other online video providers.

According to comScore, Netflix and Hulu are used more than twice as much as Amazon Video. Hulu streaming households watch 28 hours and 54 minutes a month, while Netflix homes watch 26 hours and 54 minutes a month. Amazon video streaming homes watch just 10 hours and 42 minutes a month.

This data strongly suggests that Amazon customers start looking for video somewhere else before they turn to Prime Video. For Amazon to be successful, it will need to reposition Prime Video as the first place its customers turn to when they want entertainment video on television.

Netflix CFO hints content spending could get more cautious

Netflix CFO David Wells said his company’s nearly unparalleled content spending could become more cautious, particular as competition increases for top content.

Speaking today at a Goldman Sachs investor conference, Wells said Netflix could possibly become more budget constrained in the future, but as long the company is able to grow the top-line and operating margin, it will continue to invest in content.

As more competitors like Amazon, Apple and Facebook look ready to spend big money for top-tier content, Wells said the bidding for that content is getting higher. He said that you have to have confidence that you’re going to monetize it effectively—confidence he said Netflix gets from its subscribers totals—but he insisted that Netflix is still disciplined on price.

When bidding on content, Wells said Netflix considers the cost and compares it to how similar content has already performed in order to determine the efficiencies Netflix can expect.

“If there’s more competition for top-tier content, we may end up producing one less show,” Wells said.

Wells’ comments seemingly had a positive effect on Netflix stock, as shares rose nearly 2% while he was speaking.

Netflix, of course, has been one of the most aggressive companies in terms of spending on content. Its $6 billion content budget for 2017 puts its ahead of SVOD rivals like Amazon Prime Video and premium programmers like Time Warner’s HBO.

While Netflix continues to spend heavily on content, the threat of price increases for the services continues to loom. When asked directly about future price increases, Wells was careful to not specifically point to when prices would increase, but instead frame his answer around building more value into the platform.

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