Editor’s Corner—How far can Amazon reach into pay TV?

Amazon sign on storefront
Amazon has built a massive streaming video service that’s slotted between Netflix and Hulu as the second biggest SVOD in the U.S. (Amazon)

As it does with retail, grocery stores and subscription VOD, Amazon looms large over the pay TV business. It’s becoming clearer that Amazon could even further extend its reach into the industry.

Amazon has already built a massive streaming video service that’s slotted between Netflix and Hulu as the second biggest SVOD in the U.S. Amazon Web Services is the preferred cloud provider for cable giants like Comcast. Amazon has built arguably the most successful model for a la carte TV with Amazon Channels. And Amazon has dug its heels into the live sports market, most notably renewing its Thursday Night Football streaming deal with the NFL, this time for two years.

Amazon has clearly already established itself as a friend of and sometimes formidable competitor with the traditional television universe. So the question is how much farther can it go toward joining or disrupting that landscape?

Parks Associates’ Brett Sappington said during the Pay TV Show, an event produced by Fierce parent company Questex, that Amazon is the only company to get a la carte TV right. On top of that, he said the company could simply begin offering full pay TV subscriptions as part of its Prime memberships. He said Amazon could afford to give away local broadcast and cable channels for free if it can figure out how to effectively tie its retail offering to that proposition. "Fundamentally, Amazon sees itself as a retailer," Sappington said.

Richard Au, U.S. director of Amazon Channels, told Cheddar that “there’s so much great content out there but unfortunately we can’t afford to license all of it, and it isn’t all available in our video store.” For a company that ended its first quarter with $7.3 billion in free cash flow for the trailing 12 months, the idea of not being able to afford things might sound silly. But the difficulties in licensing content are real no matter the size of the company, and Channels may provide a preferable method for Amazon to offer different networks on its platform without needing to license the content.

Kathy Payne, head of content acquisition management for Amazon, said, "At Amazon, we've found that a la carte really works." She said that Channels has "millions" of subscribers. "They come in, buy channels, then become Prime customers, as well. All boats rise … and what we get is more engaged and more satisfied customers."

According to the Diffusion Group (TDG), more than half of HBO DTC subscribers used Amazon Prime Channels to purchase their service. Rates are even higher for Showtime and Starz, with seven in 10 DTC subscribers using Prime Channels and only three in 10 using the TV network's website or app.

"While Amazon Prime Video continues to receive the lion's share of attention from industry media, Amazon has quietly built a stronghold in the burgeoning direct-to-consumer market," said Michael Greeson, president of TDG, in a release. "Even with Apple's pending entry into this space, we expect this dominance to expand further in the next five years."

The Channels model seems to be working for all involved. As further proof that Amazon is sticking with the strategy, Au said Amazon has no plans to offer a virtual MVPD or streaming TV service.

Amazon may have no plans to eat pay TV’s lunch, but the company could be interested in sharing a table in the cafeteria. Competitor Netflix has integrated its service into cable platforms like Comcast’s X1, and Amazon too would like to see its Prime Video service slotted in among the many channels offered on traditional cable boxes.

Au said Amazon would love to emulate Netflix’s launch on Comcast’s X1 and that by doing so Prime could help to further drive engagement on cable platforms.

"We want to be on a broad array of device platforms," he said. "We absolutely want to be where customers are streaming video."

It’s unclear what Amazon Prime Video might look like on a cable box. Whereas Netflix resembles another premium network on X1, Prime Video with Channels included looks a little more like an a la carte TV competitor to Comcast’s pay TV service. However, the X1 also includes vMVPD Sling TV, so featuring other multichannel services on the X1 doesn’t appear to be a problem for Comcast or other pay TV providers.

But if Amazon Prime Video struggles to find a spot in the cable box, maybe there’s a chance Amazon could become a supplier of the cable box, or at least an approximation of it.

When Cheddar founder Jon Steinberg hypothesized a scenario in which smaller cable operators might ask to use Fire TV Sticks and Amazon Alexa in place of cable set-top boxes, Au said Amazon would be more than willing to work on it. While a Fire TV device likely couldn’t replicate the experience provided by the hybrid STBs used by cable collectives like NCTC, it could present a cost-effective option for IP-based delivery with a popular voice-control platform to boot.

While Amazon has wound its way into several TV distribution models, it has also emerged as a well-financed content machine, evidenced by the reported $500 million the company is shelling out for its upcoming “Lord of the Rings” series. In addition to high-profile scripted content, Amazon has shown a willingness to go after big sports licensing rights like the NFL, the kind that pay TV operators depend upon to keep subscribers.

According to Parks Associates, 27% of U.S. pay TV households agree that sports programming is the primary reason they subscribe to their pay TV service.

"While broadcast and pay TV remain key sources for live sports, OTT streaming options have become an important part of the live sports landscape," Sappington said.

Amazon’s Thursday Night Football streams happen simultaneously with broadcasts on Fox and the NFL Network, so it’s not like Amazon stole the show away from traditional TV. But as Amazon explores innovative ways to deliver the content, including potential interactive elements offered on its streaming platform Twitch, it could begin to emerge as a preferred live sports alternative to cable, satellite or vMVPD providers.

Amazon will likely continue going after more sports rights both internationally and here in the U.S.; Amazon is reportedly a front-runner to acquire rights to WWE’s “Smackdown,” which will reportedly leave the USA Network as costs rise for NBCUniversal’s deal to hang on to WWE’s “Raw.”

As Amazon’s video strategy continues to evolve, it’s likely the massive and massively diverse company will continue to be both a friend and a foe to companies within the industries it touches. That balance will continue to shift as Amazon delves deeper into pay TV. — Ben | @fierce_video