When Amazon (AMZN -1.64%) investors study the company, they're likely to prioritize the e-commerce operation or Amazon Web Services (AWS) due to their large share of the top and bottom lines. It's easy to overlook smaller parts of the business that aren't moving the needle in one earnings report to the next.
However, a more comprehensive look at the company brings into the spotlight Prime Video. Here are two reasons why investors would benefit by paying more attention to the company's streaming video service.
1. The video business drums up e-commerce sales
Founder Jeff Bezos launched Amazon Prime in April 2005 to fuel the e-commerce business. But Prime membership grew slowly in the early years. To boost its membership numbers, the company added Amazon Instant Video to Prime memberships in 2011. And in 2018, Amazon Instant Video was renamed Prime Video.
At a Vox Code Conference in 2016, Bezos revealed his strategy for video, saying, "When we win a Golden Globe, it helps us sell more shoes, and it does that in a very direct way." Specifically, the higher the profile of Amazon's video content, the more people want to see the shows, resulting in new Prime members or higher engagement from existing ones. That, in turn, leads to more e-commerce sales.
This formula of leveraging popular content to attract Prime subscribers has proven sound. Most recently, Amazon's big bet on NFL Thursday Night Football paid off in the very first game with a record number of Prime sign-ups over three hours.
Moreover, these sign-ups bring meaningful revenue to the company over time. According to a Statista survey, Prime members spend an average of $1,400 on the e-commerce platform yearly, compared to $600 spent by non-Prime members.
2. Prime Video has an ad business
At one point, many people thought all Prime Video would ever be was a way for Amazon to sign people up for a Prime subscription -- a loss leader. However, that perception is slowly changing, as Prime Video has an opportunity in advertising.
Not all of the content on Prime Video is 100% ad-free. Amazon acquired IMDb in 1998, and that platform recently evolved into an ad-supported streaming service rebranded as FreeVee.
Amazon distributes FreeVee as a stand-alone app, but it also offers FreeVee's ad-supported content within the Prime Video service. And Amazon plans on rapidly growing FreeVee's ad-supported library, which includes original content like Bosch: Legacy, a spinoff of its longest-running Prime Video original series.
Why advertise? Jeff Green, CEO of The Trade Desk, once said that in a couple of years, premium video would represent more than half of what will be a trillion-dollar pie of global advertising.
Plenty of competition exists to grab that massive treasure chest of ad dollars, but Prime Video is well-positioned to capture its fair share. It has more than 26,300 movies and 2,700 TV shows, a larger library than Netflix and one of the world's most extensive streaming catalogs -- enough content to compete with anyone.
Additionally, Prime Video has a competitive advantage over its streaming challengers. It's part of Amazon Prime, a service that JPMorgan analyst Doug Anmuth valued in 2021 at $1,000, but the e-commerce company charges just $139 annually. A Prime membership's excellent value helps attract new viewers for the service.
Intense competition
Competition is a considerable risk in streaming video, however, and one every industry player is feeling right now. Despite the fact Amazon's content budget is among the highest in the industry, few of its shows are reaching the top rungs of Parrot Analytics' "Most In-Demand Breakout Series" charts. For instance, during the week of Oct. 15 to Oct. 21, Prime Video scored only one show in the top 10 in-demand shows, while Netflix had three.
A steady march of new services have launched in the past several years, many of them from leading media brands with their own treasure troves of content and experience producing high-quality films and series. Producing popular content to attract Prime members will only become harder and more expensive over time.
What's next for Prime Video?
More quality content is on the way. First, the company closed its deal to buy film and TV studio Metro-Goldwyn-Mayer in March 2022, making its content library more formidable.
Second, on a high note, it recently concluded its first of five seasons of the most expensive TV show of all time, the Lord of the Rings: The Rings of Power. Parrot Analytics rated the show in the exceptional range, meaning only 0.2% of shows in the market have that high a level of demand.
This show is the crown jewel of Amazon's strategy of producing more tent-pole hits. And it hopes the series is the start of many more blockbuster releases.
