Amazon's HBO deal: The returns on soaring technology and content costs

Amazon's HBO deal: The returns on soaring technology and content costs

Summary: Amazon spent $6.56 billion in 2013 on technology and content expenses and you can bet that those costs are going higher due to an exclusive HBO licensing deal. Will the HBO deal boost engagement and land incremental Prime subscribers?

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TOPICS: E-Commerce, Amazon
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Amazon spent $6.56 billion in 2013 on technology and content expenses. Rest assured that sum is going to surge now that it has licensed HBO's content in an exclusive deal. Sure, Amazon will land more video engagement as well as Prime subscribers, but it's unclear whether the returns on investment will pay off in a traditional sense.

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On Wednesday, Amazon licensed HBO content in a deal that is a serious shot at Netflix. For Amazon, the game is all about Prime subscribers even if its video service also happens to harm Netflix, one of Amazon Web Services' largest customers.

Bernstein analysts Carlos Kirjner estimated that Amazon paid Time Warner somewhere between $200 million and $400 million to license HBO content. Keep in mind that Amazon's technology and content costs jumped by more than $2 billion between 2013 and 2012. Amazon is off to a rousing start in 2014. These costs are worth pondering as Amazon preps its first quarter earnings. 

Wedbush Michael Pachter analyst had a similar guesstimate:

Financial terms of the agreement were not specified, although based upon recent content deals that involve payments of $250,000 per episode for popular TV programming, we believe that annual payments are likely well above $200 million.

Kirjner said:

It is also evident that HBO will help Amazon attract and retain more Prime users and drive increased transactions in its digital video store (Amazon Instant Video). Whether or not these benefits justify (economically) Amazon's growing investments in streaming content is hard to tell from the data we have. We can't tell how many incremental Prime subscribers and incremental media sales are driven by Prime Video.

The analyst also estimated that Amazon will spend about $2 billion to license streaming content in 2014, up from $1.2 billion in 2013. Again, it's all about Prime engagement for Amazon. Kirjner adds:

We think there are more than 25 million domestic Prime homes, possibly going to 40 or 50 million in a few years. Clearly a portion of these will sign up for Netflix. But we believe a number of these may decide they don’t need Netflix, either for their children (as Amazon children's content improves) or for themselves as they find enough content within Prime Video.

Either way, Amazon's recent Prime price increase has likely been spent with the HBO content licensing deal.

Topics: E-Commerce, Amazon

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  • I have both already ...

    ... and often find them redundant.

    They typically have the same "new" releases on the same date or within a few days of each other.

    I will say that Amazon's selection of videos that can be streamed without a rental fee seems to pale in comparison to Netflix. (And I say that as a former Netflix streaming customer who left for several years because the service was originally horrendously vacant of anything remotely current worth watching. They've improved it tremendously.)

    I'm also one of the millions of consumers who have cut the cable. I have no cable or satellite service to my home ... and don't really miss it, thanks to Netflix, Amazon, Hulu, YouTube and other (smaller) sources of streaming content.

    The thing that amazes me is that the networks (ABC, NBC, CBS, USA etc.) still implement ridiculous roadblocks that prevent us from online-only content consumers from watching their programming -- especially their current programming. When I try to watch a current episode from any of the big networks, they typically require me to specify which cable or satellite provider I have. I don't have any, so I'm prevented from watching the content -- which they still fill with ads, even if I did have cable provider.

    Years ago, networks were content making their money off the advertisements that they ran during their programs. Today, that doesn't seem to be enough. Which is a shame, because until they return to that model, it's going to get harder and harder for shows to be successful, because the audience with cable or satellite TV service is rapidly shrinking. So some good shows won't get the traction that they might, were they open to streaming consumers, too.

    Oh well. As for Amazon's agreement with HBO: good for them. Amazon sees the benefit of having top-notch programming available and they're willing to pay for it, to build their ecosystem.

    It makes it all the more likely that I'll keep my Amazon Prime membership when it "expires". Of course, it's already a fantastic deal just because of the "free" second-day shipping on purchases through Amazon ... which I do more and more each week, to replace having to find time to run across town to brick-and-mortar stores for whatever I need.
    imalugnut
    • Lot of good points there, imalugnut

      As a fellow Prime user, I prefer Amazon first. If the local brick-and-mortar put their inventory online and I could search for what I needed, I'd go there. Since the stores don't do that, to avoid fruitless searching in each store, I go to Amazon. The 'free shipping' isn't really free, as Prime products can be higher-priced, but not by much. I'm in it, for the reliability and the videos.

      The videos offered in Amazon are good ones. I'd try Netflix, but unlike you I am a Xfinity cable customer. What's happened, is that Xfinity has changed its bundles to include more content for the same price. You have to complain or call, to learn this. My cable bill doubled since I started two years ago, but for that price I now get what I'd have paid double to get, back then. The bill would be the same, whether I added content or not. So that's one big change; were I to cut the cable, I'd have the almost the same bill for my phone and internet, alone.

      Amazon is still preferable in many ways: 1. It's easier to find what I want to watch. 2. I can STORE what I want to watch for later viewing, right in Amazon (rather than make yet more bookmarks). 3. It streams well now, having gone through some glitches when it used Silverlight (what a nuisance that was). I don't like the new format for the video header now, but it's still useful.

      Xfinity can't compete on those things. Its remote is a royal pain to use, and its Cisco box remains glitchy (has to be powered off, same problem as Windows often has). But Xfinity does offer something Amazon doesn't, wholly: many of the TV shows are organized by season, and you can watch them back-to-back, even current season. Still, it's a pain to go back and forth with that horrible remote.

      Now, if Netflix were somehow easier to use, I'd use it. So far, I don't see a reason to use it as well.
      brainout
  • HBO would do better to severally license 'Game of Thrones'

    Many HBO subscribers like the whole or most of the HBO content. But many of us only like one or two shows HBO provides. One of them, is Game of Thrones. Seems to me HBO would do well to license a per-episode for whoever wants that license, on that show. That way they make more money from it.

    Just a thought.
    brainout