Amazon.com's (NASDAQ:AMZN) management has long held that its investments in video help drive and retain Prime subscribers. True to form, Amazon kept those numbers close to the vest, but Reuters recently obtained internal documents that provide details on just how valuable Amazon's original TV shows are to the online retail giant.
Amazon attributes 5 million Prime signups and renewals to its TV shows during the period between 2014 and early 2017. That's roughly one-quarter of total Prime signups, according to analyst estimates.
Amazon also breaks down how much it pays per subscriber by investing in its shows. The Man in the High Castle, for example, cost Amazon $72 million, but it attracted 1.15 million new subscribers, according to the documents. Other originals weren't nearly as successful.
These details give an idea of how Amazon values Prime Video as part of the Prime ecosystem.
Not always a loss leader
Amazon uses a metric it calls "first stream" to judge the efficiency of its content spending. It attributes new subscribers to the first show they stream on Prime Video. So, it's customer acquisition numbers aren't a perfect representation of actual customer behavior, but they're a good indicator.
Prime Video is historically a loss leader to get people to sign up for Prime, but with U.S. customers paying $99 per year, that's not always the case. The Man in the High Castle cost just $63 per new subscriber, so Amazon was profitable on that investment right away. The first season of The Grand Tour was even more efficient -- just $49 per subscriber. But other productions like Good Girls Revolt and Sneaky Pete have much higher costs per subscriber -- many multiples of the annual fee for Prime.
In aggregate, Prime Video is still clearly a loss leader with $4.5 billion in content costs in 2017, but first watch gives Amazon a good idea for which shows to renew and which to cut its losses on. Amazon hasn't shied away from cancelling shows while Netflix, by comparison, is seemingly willing to give its shows a longer leash. Cancelling shows is something Netflix CEO Reed Hastings actually wants to do more of as it indicates the streaming service is taking more risks.
That said, cost per first stream isn't the only metric Amazon looks at. If it were, Sneaky Pete would not be renewed for a second season.
The payoff in the long run
As of early 2017, 26 million Prime members actively streamed Prime Video in the U.S. That's about half of Netflix's domestic subscriber count as of the end of the first quarter last year. And it's an even smaller fraction of the 80 million U.S. subscribers Consumer Intelligence Research Partners estimated in April last year.
Amazon's goal is to get more subscribers watching video on its platform because its data shows that users who watch Prime Video also renew their memberships at higher rates and spend more on Amazon.com. The average Prime member in the U.S. already spends over $1,300 per year on Amazon compared to just $700 per year for non-Prime members, according to CIRP.
While Amazon's retail operating margin is thin, it's quickly improving thanks to advertising, private label products, and third-party sales as a percentage of gross merchandise volume. That makes the incremental revenue from Prime Video viewers increasingly valuable.
Amazon's big investment in video is paying off -- if not immediately, at least in the long run. A big investment like the $250 million it spent to acquire the rights to a Lord of the Rings prequel should excite investors more than it concerns them as it could draw in a lot of viewers to Amazon's video ecosystem, which still represents a small portion of Amazon's total Prime subscribers.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.