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

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?

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.

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