On TV, Amazon and Microsoft are Headed in Drastically Different Directions

Both Amazon and Microsoft once had lofty goals for original programming, but times have changed.

Aug 13, 2014 at 5:30PM

In October 2012, Netflix CEO Reed Hastings announced that he was stepping down from Microsoft's (NASDAQ:MSFT) board of directors. At the time, there was widespread speculation that Microsoft would acquire Netflix -- and that Hastings, as an obvious insider, would need to excuse himself from the process.

Instead, Microsoft went in another direction entirely, building its own internal studio and making a big bet on original programming. Amazon.com (NASDAQ:AMZN), meanwhile, was heading in a similar direction, funding pilots and working to develop a slate of original content for its upstart Amazon Prime Instant Video service.

Nearly two years later, Amazon is even more aggressively betting on original content, while Microsoft has largely abandoned its original programming ambitions.

Amazon warns of loss
When Amazon reported its second-quarter financial results last month, shares fell in the wake of disappointing guidance. For the current quarter, Amazon expects to lose between $410 million and $810 million, a drastic increase from the third quarter of 2013.

Over $100 million of that loss could be attributable to Amazon's original programming. During the e-commerce king's earnings call, CFO Tom Szkutak noted that the company would spend over $100 million developing original video content in the third quarter, up significantly from the prior year.

Amazon will unveil the fruits of that $100 million later this month. On Aug. 28, it will debut five new pilots on Prime Instant Video. If viewers are receptive, some could become new Amazon original series, joining existing shows such as Alpha House and Betas.

Nadella ends Microsoft's content ambitions
Microsoft also had an earnings call in July, but the tone was quite different. Rather than promise to spend millions on new original content, CEO Satya Nadella noted the company's decision to wind down Xbox Entertainment Studios.

Microsoft will continue to work on a handful of programs already in development, including the much-heralded Halo television series, but the company has clearly lost its appetite for original programming.

To be clear, Microsoft still appears to be interested in television -- but from a technology and hardware standpoint only. Earlier this month, Microsoft unveiled a digital tuner accessory for its Xbox One video game console, and at Gamescom the company announced that TV signals fed into the Xbox could be streamed to nearby tablets and smartphones. Both features should be quite useful to TV buffs, but serve to augment existing content rather than offer new material.

Different strokes
Ultimately, both companies' decisions make sense in the context of what they are trying to achieve.

Although Microsoft could, perhaps, win over some marginal buyers by giving its Xbox One a slate of exclusive series, most people shelling out $399 for the console are likely motivated by gaming rather than by video content.

Amazon's service, in contrast, exists outside of its hardware ecosystem -- the Fire TV supplements it, but priced at just $99, it's in another, much cheaper, league from Microsoft's Xbox. Amazon has shown that there's demand for Prime Video, and the growth of the service's content has coincided with an increase in the number of Prime subscribers. These users, in turn, are much more likely to purchase physical goods from Amazon (they tend to spend almost twice as much).

Amazon and Microsoft compete on many other fronts -- cloud computing most notably, as well as tablets. Streaming video is one area where they will not battle going forward, and it appears to be a wise decision for both companies.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com, Microsoft, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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