Amazon.com (NASDAQ:AMZN) CEO Jeff Bezos is ordering a strategic revamp at Amazon Studios, its original video division. The e-commerce giant is cancelling shows like Season 2 of "Z: The Beginning of Everything," which it had already begun writing, and "The Last Tycoon," which just launched its first season. Both shows were dramas about the writer F. Scott Fitzgerald.
Instead, Bezos has directed his Studios team to find a "Game of Thrones"-level hit, according to Variety. That statement in and of itself could be the most uncontroversial in Bezos's history. Like an NBA owner clamoring for the next LeBron James or an investor searching for the next Amazon, the wish is obvious -- but fulfilling it isn't so easyl
Of course, Amazon, like every other broadcaster and streamer, would love to have the next "Game of Thrones." It's been an award-sweeping global phenomenon for nearly a decade, and the centerpiece in HBO's leading catalog of original TV.
Netflix (NASDAQ:NFLX) thought it had its own "Game of Thrones" with its epic "Marco Polo" series. However, that show was critically panned, and the big-budget adventure was canceled after just two seasons.
But the new strategic direction of Amazon Studios, which comes as the company is launching several new shows, including a comedy with Maya Rudolph and Fred Armisen and a Seth Rogen-produced comic book adaptation, underscores the financial constraints the division is under.
Gotta pay the bills
Amazon is spending $4.5 billion on video content this year, a staggering figure that puts it behind Netflix at $6 billion and ahead of Time Warner's (NYSE:TWX) at $2.5 billion.
But unlike Netflix or HBO, Amazon doesn't charge its viewers directly, making its video available to all Prime members. In the words of Bezos, the unique Prime business model means that when it wins a Golden Globe, it sells more shoes. Free video streaming is an enticement to get more people to join Prime, which Amazon hopes will encourage them to shop more as they get free two-day shipping with the service.
The company doesn't release data on Prime membership, but it does offer figures on subscription revenue, most of which comes from Prime. That totaled $7.8 billion over the last year. At a fee of $99/year, that puts a ceiling on Prime membership at 78 million.
So if Amazon is bringing in $7.8 billion from Prime, more than half of that money went to pay for its video content. However, the principal benefit that Prime is supposed to fund is free two-day shipping. Net shipping costs, which include revenue from sources including Prime, was in the range of $8 billion over the past year. In other words, Prime alone is unable to pay for the benefits it doles out to customers. That may still make business sense for Amazon as it drives loyalty to the company, and Prime incentivizes increased spending on the website, which adds to profits. But the budget for video seems to be stretched.
Similarly, Netflix was forced to make some tough decisions about programming in order to keep its budget under control. This summer, Netflix canceled a slew of shows including Sense8, The Get Down, Girlboss, and Gypsy. As the streamers make way for new shows, it's only natural that cancellations will increase. It simply doesn't make sense to continue funding shows with low ratings.
What's next for Amazon Video?
With Prime Video available around the world, it's not surprising that Amazon would want to find another epic hit like "Game of Thrones" that translates globally, but that may not be so easy. Predicting the success of TV shows is difficult and does not lend itself to the data-driven models and high tech that have made Amazon what it is today. Even "Seinfeld" was panned by focus groups when it was first tested, and "Breaking Bad" struggled to drum up viewership in its first seasons.
Bezos may eventually get his wish, but the Prime budget can't accommodate much more spending in the video department, especially as the company promises new benefits at Whole Foods. If Amazon wants to continue increasing its video budget, a Prime price hike may be necessary. As it stands now, $4.5 billion is plenty to work with, but there's no magic formula to find TV's next #1 show.