This Is Amazon's Plan to Squeeze Every Dollar Out of Its Video Content

Image source: Amazon.com.

Earlier this month, Amazon (AMZN 1.35%) launched Anime Strike, an anime-focused streaming video channel that Amazon Prime members can subscribe to for $5 per month. Unlike the hundred other Amazon Channels from content providers like HBO, Comedy Central, and History Channel, Anime Strike is an in-house Amazon brand.

Anime Strike is just the first of several branded subscription channels Amazon plans to introduce over the coming months, according to Michael Paull, Amazon's VP of digital video. The addition of niche channels will allow Amazon to make the most of its growing content budget, which is starting to approach Netflix (NFLX 4.22%) levels.

Riches are in the niches

While Netflix remains the 800-pound gorilla in video streaming, several smaller companies have cropped up in its wake serving niche audiences. For example, Crunchyroll also caters to anime fans and has amassed 20 million registered users who can watch most of its content for free with ads and another 750,000 subscribers paying $7 to $12 per month to skip the ads and get early access to content.

These niche services can survive on smaller subscriber bases since their content costs are much lower. There is also less competition for the streaming rights to anime, for example, than there is for the latest premium television drama.

For Amazon, it may be able to secure the rights to this sort of programming through its regular deals with content creators. Bundling mainstream and niche content may allow Amazon to get better overall rates. Amazon can supplement what it buys with additional exclusive deals like the ones it made for Anime Strike, including exclusive streaming distribution rights for the series Scum's Wish, Onihei, The Great Passage, Vivid Strike!, Crayon-Shin Chan Gaiden: Alien vs. Shinnosuke, and Chi's Sweet Adventure.

Diving into additional genres like horror, kung fu, and documentaries will help power Amazon's streaming video revenue. What's more, it will make Prime subscriptions even more indispensable to any members that do subscribe to one of these new services. Canceling Prime then also means canceling Anime Strike or whatever other subscription channels Amazon eventually unveils.

Getting the most out of a growing budget

Amazon's content budget is growing rapidly -- spending in the second half of 2016 doubled compared to the prior year. Jefferies analyst Brian Fitzgerald estimated that Amazon spent between $4 billion and $5 billion on video content in 2016. That number could climb even higher to $6 billion or $7 billion in 2017 with its recent global expansion. That is right in line with Netflix's content budget for the year.

But where Netflix aims to offer enough value in its content library to appease anyone and everyone, Amazon Channels provide a mechanism for Amazon to offer more specific programming to those that really want it. That allows Amazon to undercut Netflix in the U.S. and almost every other country (it should be noted that Amazon Channels are currently available only in the U.S.).

To be sure, the vast majority of Amazon's content budget will go toward licensing content for its main catalog and producing new originals. But its ability to build out numerous niche-specific channels by throwing around its heft as a content buyer will allow the company to make those content dollars more profitable and squeeze a bit more revenue out of its video library.