Amazon’s Video Streaming Strategy
Why it makes sense for Amazon to unbundle Amazon Video
Though Amazon has always treated video as an add-on benefit, the recent announcement of a video streaming subscription indicates that Amazon has intentions to monetize this revenue stream. Until now, Amazon Video was bundled into Amazon Prime membership’s shipping benefits that Amazon started in 2005. Video is included with a slew of other perks offered for $99 per year paid upfront. The video package offers a selection of streaming TV shows and movies, and the capability to add video subscriptions.
A growing part of the video package offering is the original content which is exclusive to Amazon. Amazon’s major competitors in video, Netflix, Hulu and YouTube also push original content to subscribers, so this is not a differentiating strategy. However, when we look at video, Amazon’s competition is widespread. The “old media” or television channels are on one side, while the up-and-comers in video consisting of Facebook, Vine, Periscope, Youku, etc. are also dabbling in the same extended space.
Netflix, a major direct competitor, faced with the earnings pressure every quarter, has chosen to expand internationally. This strategy though easy to start off, is riddled with issues including local content deals, piracy and content sharing. Netflix is also doing away with the grandfathered discount for its long time users, a risky $2 increase.
Amazon Video evolved as Amazon’s response to declining media sales. In late 2006, consumers were getting used to instant gratification with increasing bandwidth availability. Amazon debuted Amazon Unbox allowing customers to download rented and purchased movies to their desktop and play them, even when offline. After the service was renamed Amazon Video on Demand and later re-branded as Amazon Instant Video with added access to 5,000 movies and TV shows, in September 2015, Amazon decided to call it just Amazon Video.
Netflix introduced streaming video in February 2007, which grew quickly as DVD sales fell. Hulu launched in March 2008 as a free ad-supported streaming service, continued limited advertising when its monthly subscription service was started in November 2010. YouTube remained an ad-supported video-sharing website until YouTube Red launched in October 2015 offering ad-free subscriptions and exclusive original content.
Facebook with Facebook Video and Twitter with Periscope and Vine, have all been nibbling at different parts of the streaming eco-system and have recently unveiled major ideas in the live TV space. On the other hand vimeo.com and dailymotion.com are the No.2 and No. 3 user-content streaming sites after YouTube with niche focus areas.
As with any technology today, the streaming life cycle has been short. There has been an upsurge in the availability of digital content and internet bandwidths. About two in five American households now subscribe to a video streaming service according to a new Nielsen report that tracked the adoption of the digital offerings. With cord-cutting becoming an acceptable word much like binge-watching, it is projected that by 2019, almost 23% of U.S. households will not pay for traditional TV. TV networks see the writing on the wall, and are coming up with their own over-the-top content (OTT) offerings, without requiring a cable subscription.
Amazon’s Next Act in Video
As the options for cord-cutters improve, and the market for cable set-top boxes open up, the role of the cable carriers and networks as gatekeepers of the television audience is certain to end. Amazon is well-positioned with original content deals, a popular streaming offering and its own Fire TV platform to make the best of this transition. If Amazon plays it right, the investment until now in generating an audience will pay off in profits as the stranglehold of traditional media loosens up.
However, with increased competition as the traditional TV paradigm is rapidly eaten up by the new players, Amazon will soon face certain key choices and considerations that will determine whether it can stay at the top of the pack, and as Jeff Bezos writes in his letter to the shareholders in the 2015 annual report, hit it for a 1,000 runs.
Streaming vs Shipping
Bezos in his 2015 letter to the shareholders also says, “These (streaming) shows are great for customers, and they feed the Prime flywheel — Prime members who watch Prime Video are more likely to convert from a free trial to a paid membership, and more likely to renew their annual subscriptions.”
Even after allocating the Prime shipping revenue, the net shipping costs are negative for Amazon, though a straight line as a percentage of revenue. If we consider that a majority of Prime revenue is allocated to shipping, it turns out that Amazon Video is a loss leader.
Regardless of Bezos’ statements to the contrary, Amazon’s earnings pressure will mean that Amazon will decide to unlock the value and offer a video only option. It looks like Amazon has been thinking the same way, and will begin offering its video-streaming service as a stand-alone option for the first time. The timing is right, given Netflix’s announcement of a rate increase.
Annual vs Monthly Subscription
Amazon’s newly announced streaming option is a monthly subscription that will cost $8.99, a dollar less than the most popular HD (Standard) plan from Netflix. This is a much needed flexibility for a video subscribers.
The decision to offer a Prime membership on a monthly basis that was announced today is a little surprising. The incentives for a subscriber to leave are much more, which makes it harder for Amazon to eliminate its shipping overhead. Amazon should be betting that a monthly Prime subscription would be a better draw for subscribers who are moving to other retail sites because of the sticker shock. However, there is reason to believe this has been priced too enticingly at $10.99, removing the incentive to choose the annual plan. Even if Amazon plays its cards pretty close to the chest, it will not be difficult to project the number of Prime members who will convert to the new option, and the new members who will join either options.
Amazon as a platform
Amazon has always behaved as a platform, and that was what differentiated it from the other retailers. Even when AWS was launched in 2006, cloud was not a popular parlance and developing APIs early on made it much more different than just another storage service. Amazon Video should also become a platform. As of now, Amazon video does not have enough options for cord-cutters beyond its own content. Amazon should expand the Video Add-On Subscriptions to include independent studios and channels. Traditional media, newspapers and other smaller websites choose Youtube as their primary video medium since Youtube is the traditional leader in user-content and short-form content. If Amazon allows video to be sold just like books or other retail items, merely collecting a transaction fee, more content-providers will be attracted to use Amazon.
Amazon has already brought in much needed variety to its Prime offering with the recent announcements. However, there is scope for more innovation in the menu, rather that the all-you-can-eat buffet. Amazon already offers incentives for buyers who choose slower shipping methods. This is an opportunity to create a secondary bundle (say Amazon Silver) with slower shipping (3-day/4-day), no limits on dollar value of purchases, and additional perks including Silver Video. The execution has to eliminate confusion, but provide value to the customer, and this will help Amazon attract more returning customers.
Amazon eco-system and external integration
Amazon does a wonderful job integrating its products such as the Marketplace, Kindle, Kindle Fire TV, iMDB etc. to create a wholesome ecosystem, and the cross-selling effect in its retail platform is incredible. However, there is a lot of potential for Amazon such as integrating Alexa, Amazon Music and Twitch to its video content. Also, Amazon has opportunities to cross-sell subscriptions and hardware with offers.
Amazon has been slow to integrate with competitor platforms like Google’s and Microsoft’s. Also, Amazon has opportunities for tie-ups with equipment manufacturers to offer Amazon Video out of the box with a new TV purchase. Hardware sales is less of Amazon’s long-term profit drivers, and potential hardware sales can be achieved by joining forces with other platforms and manufacturers.
With Youtube, Twitter and Facebook increasingly focusing on live video with presidential debate coverage and bids for sports coverage, it becomes imperative for Amazon to focus in this area. The family and friends now watch a game from across the world, not the same living room. Live concerts are another great opportunity. And if the next Kindle is a VR player, doesn’t Amazon need the live 360 video capabilities?
In August 2014, Amazon acquired Twitch.tv, a live video-streaming service focused on e-sports. Twitch seems to a wonderful platform for Amazon to start the live TV push, once it is integrated with Amazon Video. This is tricky because Amazon’s approach should not alienate the core Twitch audience. Late night TV and reality shows are big eyeball grabbers but have not effectively translated to the streaming world yet. Amazon has an opportunity to directly collaborate with talented show hosts and content producers.
Social networks and messaging platforms have the advantage that they are built for the kind of interactions that a live telecast brings in, unlike traditional TV. It is hard for Amazon to become a social platform but there are potential messaging platform acquisitions like Viber and Telegram that can bridge the gap and also help to sell goods and provide customer support. These can become the messaging sidereel for live video, and allow integrated analytics to flourish.
There is a potential for Amazon Video to start a video platform similar to Amazon Cloud Drive and Prime Photos where users can store videos and share them. Public content should be free of size limitations. Dailymotion and Vimeo are acquisitions that make sense for Amazon since they already have a substantial user base. Youtube’s greatest features are the video tracking and commenting services. Amazon already has a user feedback tracking system for its products, and it can be quickly extended to video content. Adding powerful video editing and optimization tools is key to increase user content.
Ad-supported and pay-per-view content
Ad-supported videos are one area that Amazon has dabbled in, but only to a very small extent. There is a huge potential to market premium content to non-subscribers, and trying to cross-sell Amazon products. With revenue-sharing models, it will be easy to convince Youtube producers and networks to defect, and it is reported that Amazon did try this approach. As news
Pay-per-view content under the rent or buy option is already a big part of Amazon’s collection. Amazon can offer reduced price rent or buy deals with ad-supported video.
Better streaming player & presentation
One of the biggest gripes of viewers trying to switch to Amazon Video from Netflix or Youtube is the clunky look of the Amazon Video player. Amazon’s presentation of video content tend to be limited by how it traditionally displays products in its shopping section. Videos need to appear as such, and they should work in the fewest clicks. Youtube has been very successful in building a design that aids to keep viewers looking for more, allowing a seamless experience with a variety of video quality and . For this to work, Amazon Video has to work a separation between its shopping experience and its video experience, but still cross-promote video in its shopping pages, and vice versa.
International content & translations
A pioneer in introducing online retail in international markets, Amazon has remained a laggard in international content deals, regardless of penetration into foreign markets. With Alexa and translations for subtitles, international content (for instance French or Indian movies in the United States) can find an audience across continents. Amazon can tie-up with film festivals and go more local in terms of the content it promotes in its video platform.
Summing it up
TV’s transformation means that all bets are off. Customers have an upper hand with respect to the choices they have, even if it means that they will need to shell out the same amount of money or more to maintain their entertainment options. Everyone is trying to do everything, and very soon, the market will consolidate with the more powerful players. If Amazon does not do its share to keep Amazon Video in contention, the shareholders will be losing out on a segment that can grow as much and as fast as AWS.
Table 1: Amazon Prime perks
Table 2: Changing Equations: Traditional TV vs New TV
Figure 1: Media as a percentage of Amazon revenue
Figure 2: Amazon Prime Member Estimates (United States)
Figure 3: Netflix Memberships
[Source: Netflix Annual Report 2015]
Figure 4: Amazon Shipping Costs
[Source: Amazon Annual Report 2015]
 See Table 1
 http://ir.netflix.com/long-term-view.cfm, “Video piracy is a substantial competitor for entertainment time in many international markets. It is free and offers very broad selection. Were video piracy to become easy, reliable, and socially acceptable, it could become our largest competitor.”
 “Netflix’s longtime customers will start paying $9.99 per month in May”, April 11, 2016:
 See Fig. 1
 “Nielsen Charts Reach of Video Streaming”, The New York Times, March 11, 2015: http://www.nytimes.com/2015/03/12/business/nielsen-reports-2-in-5-us-households-subscribe-to-video-streaming-services.html
“Cord-Cutting Is Accelerating”, Dec. 10, 2015:
“Cutting the Cord: Weighing whether it is words or reality”, USA TODAY, August 30, 2014:
 “Obama Presses for Open Market for Cable Set-Top Boxes”, The New York Times, April 15, 2016: http://www.nytimes.com/2016/04/16/us/politics/obama-set-top-boxes.html
 See Table 2
 See Figure 2: Prime Membership Growth Stats: …Prime memberships grew 51 percent in 2015, decelerating slightly from 53 percent growth in 2014. Paid U.S. Prime membership grew 47 percent in 2015. …Amazon could have as many as 54 million Prime members in the U.S.; the company has said only that it has “tens of millions” of members. http://recode.net/2016/01/28/amazon-stock-plummets-on-disappointing-q4-quarter-results/
“Amazon to offer video service for $1 less than Netflix”, Apr 17, 2016 10:41 p.m. ET
 “Amazon Launches Its Video Ad Business With Geico: Geico Airing Prerolls Against Amazon Prime Instant Video Pilot Episodes”, Feb 21, 2014:
 Internet can be accessed through a home internet provider/ISP or a wireless provider. Since home providers are now limiting data, the differences are leveling off.