Amazon Instant Video On Its Way To Dominance?

May.26.14 | About: Amazon.com, Inc. (AMZN)

Summary

Teens rank Amazon last among movie rental services they'll use in the next five years.

Amazon spends more cash on content than Netflix.

Yet Amazon has fewer subscribers.

Amazon (NASDAQ:AMZN) Instant Video hasn't made a whole lot of progress against its well-entrenched competitor, Netflix (NASDAQ:NFLX). While tons of teenagers love to buy things on Amazon, nearly none of them want to rent movies from Amazon.

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Source: PiperJaffray

In Q1 2014, Amazon had spent approximately $1.99 billion on content related costs. To put this in comparison, Amazon spent $1.383 billion in Q1 2013. Costs went up by over $600 million year-over-year. The content costs are inclusive of technology, but primarily consist of content development or acquisition costs.

If Amazon continues at this pace, the company will spend $8 billion or more on content licenses and development by the end of 2014.

On May 21st, Amazon booked a major business deal with HBO, and as a result, the content below can now be accessed on Amazon Instant Video:

  • All seasons of revered classics such as The Sopranos, The Wire, Deadwood, Rome and Six Feet Under, and of recent favorites such as Eastbound & Down, Enlightened and Flight of the Conchords.
  • Select seasons of current series such as True Blood, Boardwalk Empire and Treme.
  • Epic miniseries, including Band of Brothers, The Pacific, John Adams, Parade's End and Angels in America.
  • Hit original movies like Mary and Martha, Temple Grandin and You Don't Know Jack.
  • Hilarious original comedy specials from Louis CK, Ellen DeGeneres, Lewis Black and Bill Maher.
  • Pedigreed documentaries including When the Levees Broke, Ghosts of Abu Ghraib and the Autopsy and Iceman series.

Amazon's content collection is starting to look formidable, but as far as monetizing this massive pile of content, they haven't done a great job. Currently, Amazon Prime is priced at $99/year, which means consumers pay $8.25/month. That's similar pricing to Netflix, but Amazon Prime also offers free two day shipping on tons of items, and it even offers free books. Amazon has way higher overhead costs when compared to Netflix, in other words.

In comparison, Netflix spent $869 million on content in the first quarter, pertaining to international streaming, domestic streaming, and DVD. Netflix seems to be falling behind Amazon when it comes to content, but seems to be pulling far ahead of the pack when it comes to consumer appeal. So in a sense, Amazon hasn't won the war yet, even though it has thrown countless dollars at winning subscribers.

Amazon Prime has 20 million subscribers, according to the most recent estimate by RBC Capital Markets. In the most recent quarter, Netflix had a total subscriber figure of 48.35 million. So while Amazon is spending more money, Amazon Instant Video doesn't seem to have raving fans. Maybe Amazon really needs to re-brand its video-on-demand service, or buy out RedBox and consolidate video streaming into a separate product category altogether.

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Source: PiperJaffray

However, I don't blame Amazon for wanting to pursue downloading/streaming, as 55% of teens rent movies this way. Financially, it looks extremely counterproductive, but over the long haul, Amazon may have one of the most dominant video-on-demand applications. However, it's also likely that there will be other players in the space like Netflix, Hulu, and YouTube. In the best case scenario, VOD applications are treated like TV channels, and are bundled together into an internet, or mobile data package.

However, many of the internet service providers are also content buyers themselves, so combining video-on-demand with broadband is still a long way off. However, given enough time, the market will consolidate, and TV will revolve around a package of applications rather than a package of channels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.