Amazon.com (NASDAQ:AMZN) is investing massive amounts of money in building its Amazon Prime Video content library. The service is priced at competitively low prices, so many analysts think that Amazon is making a lousy financial decision by spending tons of money on digital content and charging low prices for a subscription. However, things are not as simple as they seem at first sight.
Is Amazon burning money?
Amazon does not officially disclose how much money it spends on digital video, but the company is clearly building an impressive library of expensive content. According to analysts at Bernstein, Amazon spent a breathtaking $2 billion on digital video during 2015.
A subscription to Amazon Prime, which includes a bundle of benefits such as free shipping, access to Amazon's music streaming library, and a growing collection of original TV shows and movies, has an annual cost of $99. Amazon has recently introduced a new monthly subscription option for $10.99, which sums up to $131.88 over the course of a year. The annual subscription is far more convenient on an annual cost basis, but the monthly plan may be the best choice for consumers who are not committed enough to purchase the annual subscription.
In addition, Amazon has recently launched Prime Video as a stand-alone service for $8.99. The full Amazon Prime service looks like a much better deal than Prime Video alone, so maybe Amazon launched its video service to show to potential customers that Prime is a full-blown bargain.
It's important to note that Netflix (NASDAQ:NFLX) is the global leader in streaming, and the company has recently increased the price of its standard plan from $7.99 to $9.99 monthly. Hulu offers both a limited commercials plan for $7.99 per month and a commercial-free version for $11.99. Time Warner (NYSE:TWX.DL) is offering HBO as a stand-alone service via HBO Go, and the subscription is priced at a considerable premium versus other players in the industry, at $15 per month.
The main point is that Amazon Video is competitively priced versus other online streaming alternatives, and the full Amazon Prime service is an even bigger bargain for subscribers. Amazon has a well-earned reputation for focusing on revenue growth above profitability, and many industry observers believe that the company should raise prices for both Amazon Prime and Amazon Video.
More profitable than you think
When looking at Amazon's subscription services in isolation, it's easy to reach the conclusion that the company should increase prices. On the other hand, Amazon Prime members are more loyal to the company, they tend to buy more often, and they spend more money than non-members on Amazon's online retail platform. This allows Amazon to monetize subscription video by increasing sales of all kinds of products.
In the words of Amazon CEO Jeff Bezos, speaking at the Vox's Code Conference:
We get to monetize [our subscription video] in a very unusual way, When we win a Golden Globe, it helps us sell more shoes. And it does that in a very direct way. Because if you look at Prime members, they buy more on Amazon than non-Prime members, and one of the reasons they do that is once they pay their annual fee, they're looking around to see, "How can I get more value out of the program?" And so they look across more categories -- they shop more. A lot of their behaviors change in ways that are very attractive to us as a business. And the customers utilize more of our services.
Because we have this unusual way to monetize the premium content, we can charge less for the premium content than we would otherwise have to charge, if we didn't have the flywheel spinning to help sell more shoes.
According to estimates from Consumer Research Partners, the number of Amazon Prime subscribers in the U.S. could be in the neighborhood of 54 million as of the end of 2015. This means that nearly half of U.S. households have an Amazon Prime membership. The research company calculates that Prime members spend an average of $1,100 a year on Amazon purchases, substantially higher than the $600 a year that non-members spend on Amazon.
Amazon is much more than an online retailer; the company is a combination of businesses that includes segments such as online retail, Amazon Prime, and its Amazon Web Services cloud computing division. The different businesses complement each other quite well, so the whole is worth more than the sum of the parts when it comes to Amazon.
Andrés Cardenal owns shares of Amazon.com and Netflix. The Motley Fool owns shares of and recommends Amazon.com, Netflix, and Time Warner. 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.