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Building an entertainment engine requires two things, hits and a huge catalog of content. Hits are your IP (Intellectual Property) which brings the customers to the platform and then it’s the catalog selections (what else can I watch) that keep them glued to a service.

Winning in entertainment means loyalty and access to consumers’ wallets. And Amazon is playing this game well and spending a lot of money to build content. Take Ring of Power for example. If you recently, ordered from Amazon, you must have seen the advertisement for “The Ring of Power” on the box. Amazon spent an astonishingly $462M producing the first season equivalent to $57M per episode – nearly twice the cost of stranger things season 4. Not just this, Amazon has committed another $250M for season 2 as part of the deal with Tolkien.

The world’s most expensive TV series comes to the subscribers of Amazon at the cost of Prime membership, i.e. $139/yr. And it’s not just “The Ring of Power” that is available to the prime customers. As a Prime member, you have access to almost 21k free titles, along with 40k tiles which are available to rent or buy. In addition, members get access to Thursday Night NFL, MLB, NBA season pass, Prime Gaming, some free book titles with kindle, and of course free 1-day shipping. This is some deal. Well WELCOME TO THE AMAZON’S CIRCLE OF ENTERTAINMENT.

The AMAZON’s CIRCLE of ENTERTAINMENT

Follow the chart above. The faded red cloud is the circle Amazon offers its prime members. Most of it is available at the cost of prime membership whereas few things require over-the-top payment (like renting a movie or books).

Within this faded red circle, Amazon is trying to build a journey that keeps the user hooked. Owning the rights to great book titles like J.R.R, converting them to movies/series, and then monetizing via game publishing and finally Twitch for streaming. Don’t forget that amazon.com already sells merchandise which is critical upsell for a movie business (remember Disney —> Disneyland —> Merchandise). By offering videos, gaming, and twitch at the cost of prime membership (which is not cheap) Amazon is building a universe of Intellectual Property which has hits and niches. How big will this make Amazon Prime Video a company on its own? Find out below 👇👇.

Amazon Prime Video – Worth a Trillion Dollars

Prime from Amazon is a unique service. None of this kind exists in primary markets. eCommerce + entertainment — all-in-one deal. You get delivery, movies, sports, gaming, and live streaming. Don’t forget music which is available to prime members as well (for free with a lot of ads) or $8.99 for no ads. None of Amazon’s competitors are able to emulate any of this.

According to JP Morgan analyst, a fee of $139 annually delivers values worth $1000 to its customers. This is very difficult to emulate, I mean others have tried and failed. Walmart and Costco considered launching their own streaming service but abandoned the idea because of very high investment costs.

Similarly, Netflix and Disney will not make a move into the e-commerce or cloud industry. This is simply moat at its best. And it’s a sizable moat. You get everything with one Amazon subscription. If Amazon continues at this rate, it will soon hit $100B (considering price increases in subscription revenue) and with a low P/S of 10, it’s a $1T valuation.

Economics of Amazon entertainment

Economics of the subscription cost

I think it’s impossible to look at the economics of Amazon entertainment solutions in isolation especially since we cannot ignore the impact Amazon’s e-commerce has on overall prime membership. There could be one reason to buy prime but multiple to reasons to stay.

The first significant impact is the sales. According to fool.com, the average rate of spending for a prime member is $1400 per year compared to $600 per year by a non-prime member. I believe the reason it happens is free shipping for prime members. Let’s say if I order 25 times online from Amazon, each shipment for non-prime members costs $5. I end up paying $125 in shipments. Free shipping does two things. First convinces the member to continue to shop from amazon. And Secondly, it convinces members into buying prime because it makes perfect sense to pay $139/year and get other entertainment benefits.

For customers Prime offers cost savings, for Amazon its Loyalty and Predictability.

Products and Businesses

Now, remember as a customer you already have achieved breakeven with just shipments and it makes no sense to move away from such a service (provided you order at least 25 times a year from Amazon). What if this service becomes costly in the future and Amazon charges let’s say $200/year? Would you still pay? (remember you only need 25 shipments @$125/year). Probably yes and this is where content comes in handy. Amazon’s moat now becomes content + free shipping its no longer free shipping alone.

How will content help Amazon retain members, well with a combination of Netflix (streaming/OTT) and YouTube (streaming + SVOD/TVOD – YouTube TV), and Apple TV (Streaming + Live sports streaming). Amazon has enough economies of scale to offer a combination of these services at a cheaper price than Netflix and Disney. Why? Because it has AWS, the tech support costs go down considerably compared to Netflix and Disney which use AWS for compute and storage. Apple will be an exception because of economies of scale too. Reaching members with a $15/month services model (includes news, storage, music, tv, sports, fitness, etc) and in-house cloud storage offers Apple enough leverage. Plus both Amazon and Apple have enough cash on their balance sheets to acquire rights for live sports.

That is why I argued in my previous article “future of sports streaming” that sports streaming will help SVOD services retain members especially the ones that moved out of cable TV as their non-sports streamer cable friends chose streaming services (like Netflix, because they are only interested in content consumption but no sports).

Economics of Long Tail Effect

The long tail effect provides infinite choices with hits and niches. Long tail states you attract customers by selling hits (like The Transparent, or The Marvelous Mrs. Maisel) and keeping them with niches, and providing zillion options to explore after they are done with hits. Hits are very limited but niches are plenty. The reason niches are important is that they are made for specific audience tastes. Having enough niche segments is key to the TV business. The chart below shows the depth of content top streaming services has.

Comparing Amazon subscription costs with other services

The cost of Prime for a household is $139/year which equals $11.5/month. Or you can buy an $8.99 Prime Video membership alone. Either option is cheaper than Netflix’s Standard plan which costs $15.49/month and the Disney plus bundle (Disney + Hulu + ESPN) which costs $13.99/month. Now, remember Netflix and Disney only offer to stream, whereas Amazon gets the full circle (streaming + gaming + twitch + delivery).

Having said that Amazon making or losing money on the $139 subscription is hard to state. One thing is for sure as the production costs go up, more content is put and more money is paid to creators, I am very positive that Prime members will be asked to pay more in the years to come. Specifically considering sports streaming rights are not cheap and making another “ring of power” will not be easy.

Twitch

This is a bonus section but deserves special attention within the Amazon entertainment circle. Amazon bought a great company at a great price ($955M) in 2013. Twitch provides live streaming and in the entertainment industry, the popularity of live streaming is reaching new heights, especially in gaming.

The uses of live streaming expand from streaming games to social e-commerce to fitness to the medical field. Medical live streaming was started during COVID with virtual interaction with doctors. There are a lot of startups and know players in this field including Facebook Gaming and YouTube Gaming. But Twitch is unique and the chart below will show that.

Twitch alone had over 30M DAUs and at any given time there are 2.5M users watching streams. It has 24B watch hours compared to 5B for YouTube Gaming. How about we compare it to YouTube (instead of YouTube Gaming)? YouTube had 2.6B MAUs and 122M DAUs. YouTube does have 20x more MAUs but only 4x DAU, showing Twitch has better user engagement than YouTube.

Twitch is good at making money. Simply put money comes from Ads, Subscription fees (premium to not watch ads), and Its partner program. Let us not forget that in the content business, a company cannot continue to earn unless it thinks about its creators. Twitch makes sure of that and ensures the streamers are also making money.

The growth and boom in live streaming will continue as the availability of 5G internet, compute power, and bandwidth increases.