Streaming video has long been a centerpiece of the Amazon (NASDAQ:AMZN) Prime loyalty program. The company continues to invest more and more in original content and licensed streaming rights in an effort to attract more members worldwide. And it's worked. Amazon CEO Jeff Bezos revealed this spring that membership had topped 100 million.
Rival retailers Costco (NASDAQ:COST) and Walmart (NYSE:WMT) have certainly noticed Prime's success, and both are now considering launching their own streaming video services. Costco's effort is still in its preliminary planning stages, according to a report by The Information [subscription required]. Walmart has already commissioned its first original series -- a reboot of "Mr. Mom" -- for its Vudu video-on-demand service. But both might find it difficult to compete in the increasingly crowded streaming video space.
Promoting store loyalty with video
Costco membership comes in two tiers -- Gold Star and Executive -- and its planned streaming video service would be tied to the more expensive Executive level. At $120 a year, it costs twice as much as the basic membership, but includes a 2% rebate on all eligible Costco purchases.
That executive membership can be a good deal for heavy Costco spenders, and it can be an incentive to make additional purchases there in order to get your money's worth. As CFO Richard Galanti noted on Costco's fourth-quarter earnings call, "I know the Executive member is more frequent, more loyal than a Gold Star member."
Convincing more people to upgrade to the more expensive membership level via additional perks like streaming video could make Costco's customer base even more loyal. Of course, correlation doesn't equal causation. It might just be that the people who sign up for the executive membership already know they're going to spend a lot at Costco. That said, humans are susceptible to the sunk-cost fallacy, so getting them to lay out that extra $60 a year could, indeed, influence them to spend more in its stores.
It's a strategy that's worked extremely well for Amazon -- about half of all online product searches now start on its website. That's because Prime members want to get the most out of the 2-day shipping service they're shelling out $119 a year for. Amazon management notes that people who stream Prime Instant Video are more likely to renew their Prime memberships.
Can Walmart expand beyond ad-supported streaming?
Walmart has been offering free streaming video content for about two years via Vudu's Movies on Us service. The retailer offers a large amount of shopper data to advertising partners -- reportedly more than Amazon, which has seen its advertising business balloon over the last couple years. Like Amazon, selling advertising could benefit Walmart twice -- once when it sells the advertisement and again when it sells whatever product the advertiser is advertising.
Walmart is also reportedly considering a premium streaming video-on-demand service tied to Vudu. It could theoretically take the ad-supported content it owns and repackage it without ads for a price. Or it could buy all new content for the premium service. Other streaming services have used a similar hybrid model.
Is there room for more?
There are plenty of popular streaming-video platforms already, and their offerings often are considered to be among the best in all of television and film.
Ad-supported platforms have had success with older licensed content, and Walmart has a platform to attract viewers with Vudu. But it has been running Vudu's Movies on Us service for two years, and it hasn't gained much traction. Vudu claims 25 million registered users, but it has released no data about how many are active on a monthly basis, nor how many have tried the free streaming service.
Meanwhile, Costco will need some top-notch video content if it expects to use its streaming service to convince members to pay an extra $60 per year. While it has a more than 90 million members who could spread the word about its shows, they will need to be of a certain quality before that word of mouth is likely to make any impact. Amazon Prime has produced several high profile series and films, as well as several niche hits, all of which have prompted members to encourage their friends to sign up.
Overall, it will be hard for Costco or Walmart to simply dip their toes in the streaming video waters to test the temperature. With so many great options available already, they'll have to come out the gate with a quality product, which means spending a lot of money. It's not clear yet whether that's part of either retailer's plan.
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. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.