In its second-largest acquisition, Amazon buys the company for $970 million.
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That price tag might prove unsustainable, as even offsetting it with a significant gain in subscribers is unlikely, Rayburn says. “What happens once you go through all the episodes? How many original series can they produce at $100 million each?” he says. “They’d like to make more, but they can’t get enough new subscribers to cover that cost.”
In 2012, Netflix reported it had committed more than $5.6 billion to acquire streaming content, including $3.2 billion in obligations beyond 2012. Amazon, on the other hand, only reports future costs for acquiring and licensing outside content of $723 million, spread through 2013-2017.
Amazon Instant Video lists 70,251 movies and TV shows available to stream and Hulu says it offers 70,850 movies and TV shows between Hulu and Hulu Plus, accounting for 54,000 total hours of programming. A single licensing deal Hulu made with CBS last year added more than 2,600 episodes of that network’s TV shows to its library, it says.
Netflix does not reveal the exact size of its digital library, but the retailer’s annual letter to investors boasted that its offerings dwarfed those of its competitors. In the letter, Netflix presented how many of the top 200 most popular movies and TV shows in its library appeared in Amazon Prime, Hulu Plus and Redbox Instant, a newer startup competitor stemming from the Redbox kiosk-based DVD rental service. “Of these 200, 113 are not on Amazon Prime, Hulu Plus or Redbox Instant,” Netflix writes. “Of the 87 that are available on at least one of these services, Hulu Plus offers 27 of the 200; Amazon Prime 73 of the200; and Redbox Instant 12 of the 200, with significant overlap in TV between Hulu Plus and Amazon Prime, and in movies between Amazon Prime and Redbox Instant.”
Despite high costs compared to licensing agreements, there is, nonetheless, an argument for heavily investing in an original show like “House of Cards.” “Content can constitute a powerful differentiator if Netflix or Amazon.com can come up with a huge hit that’s only available in its system, whereas much of the licensed content can be available elsewhere,” says Paulo Santos, an independent analyst and founder of finance web site Thinkfn.com. But he adds that keeping an original hit exclusive also makes it more expensive, as a retailer won’t earn money from deals to stream those shows via other providers.
Neither Netflix nor Amazon responded to requests for comment. Amazon is No. 1 in the Internet Retailer Top 500 Guide and Netflix, No. 9.
Amazon’s goal might be to lure customers into its Prime program, Santos says, which could appeal to consumers as a cheaper alternative to Netflix, at $79 per year for Amazon Prime versus roughly $96 per year for Netflix’s streaming video service. That’s in addition to Prime’s other benefits, notably free two-day shipping on all Amazon orders. But, while Santos concedes that Amazon may be in a position to gain some extra sales from new Prime members, he cautions that those members won’t necessarily buy significantly more than other customers.
Originally, customers self-selected to sign up for Prime because they knew they’d buy enough earn back the annual fee in saved shipping costs, Santos says. “This led to statistics saying that Prime members bought much more often than non-Prime members,” he says, but in reality that data is biased, since customers who bought more were the ones who tended to sign up so they’d save on shipping. “Knowing this, it’s not likely that Prime members getting Prime because of streaming will increase their buying a lot—but they might increase it some,” he says. With the retailer’s history of aggressive pricing, including adding Instant Video as a free service with Prime membership, he isn’t convinced that it will pick up enough new Prime members to justify the cost of producing original content.
“If we know Amazon, I’d say that at some point it will try to compete harder on price, even accepting more losses,” he says. “The most probable result at this point, however, is for [original content] to produce losses for the whole company.”
Rayburn of Frost & Sullivan disagrees. He says that Amazon can potentially make up for some production losses in other parts of its business, not just through extra shopping from Prime members. For example, Amazon has more ways to make money on the same digital content than Netflix. It not only offers TV shows and movies via instant streaming and as rentals, like Netflix, but Amazon customers can purchase hard copies or downloads of many titles, too. Additionally, Amazon sells hardware used to stream Internet videos, such as computers or gaming systems, including its own line of Kindle tablets. The retailer also hosts its digital library on its own network of servers, Amazon Web Services, thereby reducing the costs of offering that content to customers compared to what Netflix pays for hosting its library on the same network.
“Amazon is the winner in the long run because they own many parts of the industry,” Rayburn says. Those parts may be the technology and content related to Amazon Instant Video, or they may be among the retailer’s many other business offerings, such as general merchandise or marketplace sales, he says. “Amazon has tons of business models. Netflix has one.”