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Is Amazon Spending Too Much Cash on "Lord of the Rings"?

By Leo Sun – Jul 11, 2019 at 9:10AM

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The tech giant wants to bind TV viewers and online gamers with two shiny new rings.

Amazon (AMZN -2.02%) generates most of its revenue from its e-commerce and cloud businesses, but the tech giant is gradually expanding its ecosystem into adjacent markets like streaming media and online games.

Prime Video, which competes against Netflix (NFLX 1.07%) and other streaming platforms, is a popular perk for Prime members. Amazon Game Studios, which was founded six years ago, develops games for Amazon's Appstore, PCs, gaming consoles, and iOS and Android devices.

These efforts, which attempt to tether more users to Amazon's ecosystem, generally didn't garner as much attention as its core businesses. However, two new projects based on Lord of the Rings -- a Prime Video series and an MMORPG (massively multiplayer online role-playing game) -- are raising eyebrows with their high price tags.

A young woman eats popcorn as she watches a video on her laptop.

Image source: Getty Images.

Granted, Lord of the Rings has a massive fan base, and the three Peter Jackson films in the early 2000s grossed over $2.9 billion worldwide. But is Amazon placing too much faith in the franchise's ability to bind more users to its ecosystem?

Amazon's $1 billion streaming video series

Amazon reportedly set aside $1 billion to produce its Lord of the Rings prequel series. $250 million of the total was spent just on acquiring the rights, and the remaining $750 million will be used to fund a five-season run that will start in 2021.

For comparison, the entire Lord of the Rings movie trilogy -- which runs between nine to 11 hours, depending on the version -- had a production budget of about $281 million. A single season of Amazon's show, which should have a similar running time, would cost about $150 million.

In that context, Amazon's budget sounds more reasonable. But it's still higher than the budget of the final six-episode season of Game of Thrones, which reportedly cost about $15 million per episode, or the first season (10 episodes) of Netflix's The Crown, which cost about $130 million.

Splitting a $1 billion budget across five years equals just $200 million in spending per year for Amazon. That's peanuts for a company that generated $233 billion in revenue and $10 billion in profit last year, and could be a worthwhile investment if it helps Prime Video gain ground against Netflix.

But Amazon still faces a tough uphill battle: Netflix controlled 68% of the U.S. streaming video on demand (SVOD) market last year, according to Parrot Analytics. Amazon ranked a distant second with a 10% share, and it will soon face tough new rivals like Disney+.

Amazon's answer to World of Warcraft

Amazon Game Studios struggled to stay relevant in the crowded gaming market in recent years, and it recently laid off dozens of developers and scrapped some unannounced games. However, the subsidiary remains focused on completing previously announced games like its MMORPG New World and the battle royale game Crucible.

A young woman plays a PC game.

Image source: Getty Images.

After the restructuring, Amazon Game Studios announced that it would work with Athlon Games, a subsidiary of Chinese game publisher Leyou, to launch a free-to-play MMO title based on Lord of the Rings.

High-end MMOs can be expensive to produce. Activision Blizzard's (ATVI -3.58%) World of Warcraft reportedly cost $200 million to develop and maintain during its first four years. The first version of Square Enix's Final Fantasy XIV reportedly cost over $400 million, while Electronic Arts invested up to $500 million in Star Wars: The Old Republic.

Amazon probably wouldn't wince at those blockbuster budgets, but its Lord of the Rings game should cost less for three simple reasons: It already owns the game rights, it's letting a partner studio do the heavy lifting, and it will likely host the game on Amazon Web Services (AWS) to cut cloud hosting costs.

However, partnering with a Chinese studio to create a licensed game is a risky bet. Activision's decision to let NetEase make a mobile version of Diablo, which resembled a tweaked version of an older NetEase title, backfired and alienated the franchise's fans last year. But if the game is well received, it could complement the Lord of the Rings show when it arrives.

No, Amazon isn't spending too much cash on these projects

The media often highlights Amazon's $1 billion budget for its Lord of the Rings show, but that spending is being spread out over several years and would only account for a small percentage of its overall profits. A Lord of the Rings MMO also sounds expensive, but it probably won't cost as much as other high-end MMOs.

Both projects advance Amazon's strategies of expanding its Prime ecosystem, which has over 100 million U.S. subscribers, and extending its reach into adjacent markets. On their own, these projects might not be profitable -- but Amazon can easily offset those losses with its higher-margin AWS revenues.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, NetEase, Netflix, and Walt Disney. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.

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