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One of the biggest challenges in the entertainment business is anticipating what viewers want to see and then delivering a product that lives up to the hype. Once upon a time, this was accomplished through focus groups but thanks to the advent of technology a new trend is emerging -- entertainment crowdsourcing.

Entertainment Crowdsourcing

Specifically, companies are using technology to poll a wide variety of viewers as to what they like and what they want to see, then using that data to create movies and television shows. One of the most famous examples of this is the Samuel L. Jackson movie "Snakes on a Plane" which was heavily influenced by online collaborators. While the movie wasn't quite the success its producers had hoped for, just barely topping its $33 million budget, it was the start of a trend. Streaming content provider Netflix (NASDAQ:NFLX) even tried to offer a $1 million prize to anyone who could improve on its recommendations system.

The problem is that a lot of money goes into setting up an environment that is reactive enough to incorporate suggestions from the public and that data is further skewed by the fact that those providing the suggestions may not be representative of the viewing population as a whole.

Background

Enter online retailer Amazon (NASDAQ:AMZN). The company opted to take entertainment crowdsourcing to a completely different level -- and it could mean huge returns down the road for the patient investor.

The Washington-based online retailer offers a variety of products through its websites, both as a retailer and as a marketplace aggregate. In addition, Amazon also offers web services, direct publishing, and a range of digital entertainment products as well as a service called Prime which entitled customers to free 2-day shipping and a range of movies and television shows to stream for free -- from my experience a very similar catalog to that offered by rival Netflix.

Issues at Hand

As of March, the number of Amazon Prime members was reportedly over 10 million -- that's a huge base for Amazon to work with. However, rather than ask for viewer opinions and preferences, like Netflix, the retail giant took a different approach. It produced a series of pilots and encouraged viewers to rate whether they liked them or not. The top-rated shows would go on to full production.

Consider how much this saves Amazon. Netflix spent roughly $100 million to produce its hit series "House of Cards" -- but that money would have been wasted had the show flopped. In comparison, Amazon is spending only around $1 million to produce each pilot.

Fundamentals

The two companies are pretty similar with regard to quarterly average revenue growth -- Amazon is at 32.03% while Netflix is at 29.21% -- but where they are headed seems to be very different. Right now, Amazon is trading at $269.20 on a 52-week range of $206.37 to $284.72, with a one-year target estimate of $313.82. That would make for a return of over 16% if consensus estimates are right. Compare that to Netflix. The company is trading at $226.25 on a 52-week range of $52.81 to $248.85, and carries a one-year target estimate of $203.27 -- that's a projected 10% decrease in share price.

Summary

Entertainment crowdsourcing may be in its infancy, and it may have had mixed success, but I think Amazon has got it right. A big online retailer like Amazon is going to know a thing or two about keeping costs down -- as its pilot program demonstrates. Moreover, a company that takes $1 million bets is more likely to come out on the winning side than one which bets $100 million per series.

Source: Crowdsourcing Entertainment: How Amazon Is Taking On Netflix