Amazon's $2B estimated content spend easily subsidized by Prime subscribers, analyst says

Retail and streaming video giant Amazon (NASDAQ: AMZN) is well positioned to increase the amount of original content it produces, while still turning a profit, a new research note from Ampere Analysis says. That's because its Prime subscribers' spending behaviors drive profitability across its site. Further, Amazon may be looking to expand its Streaming Partners Program internationally, a launch the research firm says "is imminent."

How are Prime subs driving revenue? Amazon last year spent an estimated $2 billion on content acquisition, Ampere estimated. Each $1 billion in content spending can be covered by adding just 7 million to 8 million new Prime subscribers, meaning Amazon needed to only add about 15 million new subs to cover its 2015 bill. While the subscription revenue is certainly relevant, averaging about $130 per sub, each of those new subscribers is also likely to spend twice as much on the retail side of the site as a non-Prime customer, the firm said, or on average about $600 per year.

"Simply put, Amazon can justify spending on content that supports adding and retaining Prime subscriptions because these customers spend over twice as much on other items," said Richard Broughton, director at Ampere, in the market analysis sent to investors.

That makes attracting new subscribers to Prime and retaining existing ones of tremendous importance, the firm said -- something Amazon has iterated in its earnings calls for several quarters. Former Amazon Chief Financial Officer Tom Szkutak said in a January 2015 earnings call, for example, that subscribers tended to spend more across the site. "We see that customers that are video streamers, even though we have high renewal rates, they are renewing at even higher rates than others," he told investors and analysts. "We see those people who were customers who were streaming have very similar purchase patterns on the physical product side as those who don't."

Those patterns evidently have continued, and Amazon indicated in its first-quarter 2016 earnings call that it would "significantly" increase spending on original content this year.

Also of interest to Ampere, however, is the retail giant's plan for its Streaming Partners Program, which launched in early December. While it is primarily a managed online video service platform for content distributors and owners, one that can particularly help smaller SVOD providers reach a wider audience base in a cost-efficient way, Ampere feels that there is potential for the program to compete with traditional pay-TV providers as an a la carte offering.

"New services are being added regularly, and we believe it is only a matter of time before these are bundled into larger and more expensive packages -- akin to traditional pay TV tiers," Broughton said.

While Ampere didn't detail how an a la carte or skinny bundle would fit into international expansion plans, for Amazon, branching out the Streaming Partners Program into its current operating areas overseas might be a way to get a video toehold in countries where Prime Instant Video has not yet launched. For example, Prime subscribers in France, Italy and Spain can't get its SVOD service at all.

And new regulations proposed by the European Union would require foreign streaming services to offer at least 20 percent European-produced content. Offering a Streaming Partners Program to local streaming services in the EU could be a way to meet and surpass that 20 percent requirement.

Related articles:
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Amazon Prime may have 54M subscribers, must focus on retention, analyst says
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