Creating a box office hit isn't easy. Even though the most recent film from Amazon.com (NASDAQ:AMZN) -- Late Night -- received positive reviews, the box office sales didn't match up. The film has grossed less than $20 million domestically, and it's unlikely to see much more after the sparse turnout in its opening weekends.
Amazon spent $13 million for the rights to Late Night and another $33 million or so marketing the film. As of this writing, that makes Late Night a significant money loser for Amazon. And it's just the most recent in a string of losers since Amazon had success with The Big Sick.
While Amazon is pouring millions of dollars into these films, it's also spending heavily on improving its logistics network and speeding up shipping for Prime members. After all, that's why consumers subscribe to Prime: fast shipping. That raises the question of whether or not Amazon should continue investing in films and instead focus its efforts on other Prime benefits.
The difference between a streaming hit and a box office hit
While Late Night was struggling to attract an audience in theaters, Netflix (NASDAQ:NFLX) said Murder Mystery -- its latest Adam Sandler film -- garnered nearly 31 million unique viewers in its "opening weekend." That's a record for a Netflix original.
Meanwhile, critics panned the film. And if Murder Mystery saw a theatrical release, it also would've likely struggled to draw ticket buyers going up against Toy Story 4, Men in Black International, Aladdin, and huge box office releases. Mindy Kaling and Emma Thompson might not have quite the same draw as Adam Sandler and Jennifer Aniston, but they still hold considerable comedic star power. And indie comedy Booksmart has also struggled to sell tickets despite near-universal acclaim.
Maybe Netflix knows something everyone else doesn't. A successful film doesn't necessarily mean it'll sell tickets at the box office. Amazon might have lost a lot of money on Late Night and pretty much every other film it's distributed over the last two years, but that doesn't mean those films don't add value to Prime Instant Video when the service starts offering them.
What's the cost?
If Amazon's films are often more valuable on its streaming service than they are in movie theaters, why doesn't Amazon release them straight to Prime Video? Netflix champions its day-and-date release for nearly all of its films. Only a select few Oscar contenders get the big-screen treatment.
For Amazon, there's relatively little cost but significant upside.
Unlike Netflix, Amazon doesn't rely on its video content to drive Prime subscriptions. Video helps keep Prime members engaged -- which is increasingly important after it started offering a monthly plan -- but it's not the main reason people sign up. Consumers sign up for Netflix to stream movies and TV series, so short theatrical windows produce a lot more value for Netflix than they would for Amazon.
Releasing a movie to theaters gives Amazon the opportunity to bring films to its streaming service having potentially already made a profit. While it has to spend more on marketing, executives believe the net costs will be smaller by distributing the films to theaters. Additionally, films with theatrical runs might be perceived more positively than those that go straight to streaming, even if the box office performance was subpar.
Overall, the amount Amazon is spending on its original films and their marketing is relatively small compared with the massive investments it pours into shipping. It's proportionate with the value Prime members put on each benefit of the service. And while Amazon is losing money on most of its releases as measured by ticket sales, it's worth pointing out Netflix is "losing money" on its films, too, with its minimal box office runs.
Amazon investors shouldn't get too worried over yet another disappointing weekend at the movies. Relax, order some popcorn from Amazon.com, and wait for Late Night to come to Prime Video.