Amazon’s proposed US$8.5bn purchase of MGM[i] would not only significantly enlarge the back catalogue of films and TV shows available on Prime Video but also further accelerate Amazon’s famed “flywheel” network effect on the Prime ecosystem and growth in membership. The deal, subject to regulatory approval, is not even the biggest in the media sector this year, signs of the broader turbulence in the industry as TV and cable companies witness the unravelling of the profitable but declining cable television business.
This is the biggest acquisition by Amazon since acquiring Whole Foods in 2017, and the announcement comes just a few weeks ahead of the change in guard at the helm, with Andy Jassy slated to become the CEO on 5th July. Mr. Bezos had outlined the flywheel effect famously during his keynote at the Code conference back in 2016, “We get to monetize [our subscription video] in a very unusual way. When we win a Golden Globe, it helps us sell more shoes. And it does that in a very direct way. Because we have this unusual way to monetize the premium content, we can charge less for the premium content than we would otherwise have to charge if we didn’t have the flywheel spinning to help sell more shoes.”
US telco AT&T last month [May 2021] unveiled its US$43bn plan to merge WarnerMedia with Discovery to create a subscription video on demand (SVOD) platform forecast to generate an annual turnover of US$52m by 2023 (read Jonathan Kriegel’s blog WarnerMedia and Discovery combine to form a streaming giant here). Like the AT&T and Discovery partnership, Amazon’s move for MGM’s back catalogue is ostensibly focussed on a fast, convenient boost to the library of TV shows, movies and documentaries it can offer to its Prime video subscribers in the hope it will keep existing customers and attract new ones. The deal also comes amidst a recent article[ii] by The Information that reports that Disney may be on the verge of buying Comcast’s minority stake in Hulu.
But Mike Hopkins, senior vice president for Prime Video and Amazon Studios, pointed to the underlying value of the deal as MGM’s intellectual property and talented team, with the two companies combining to “re-imagine and develop together”. Analysts agree that the deal is more about talent than content, pointing out that MGM’s library needs to be constantly refreshed with new productions if Amazon keeps producing new unique and exclusive titles, which will keep subscribers coming back for more over the long term.
The Prime video, music and gaming proposition
Amazon also has an opportunity to integrate its different media assets into a more cohesive whole. However, it seems unlikely they will be decoupled from the Prime package, which offers free delivery any time soon. Moreover, prime membership does not just include access to Amazon’s film and TV library – subscribers also get Audible, Prime Music and Twitch, the live streaming platform for gamers which had around 140m monthly active users in January 2021 (26.5m per day, and over 2m watching Twitch streams at any given time). The company also owns its own games development division – Amazon Games (formerly Amazon Game Studios) – which has created titles including Crucible, The Grand Tour Game and soon New World, a massively multiplayer online role-playing game due for release on 31st August this year . And this is on top of Amazon’s recent investments in broadcast rights for live sports such as the National Football League.
Other motives are also apparent, including the expansion of Amazon’s advertising revenue. The company already runs its own free ad-supported TV platform via IMDb TV, which allows viewers to pay US$1.99 to watch a TV episode via Prime or watch it for nothing with ads included. The addition of MGM’s content library considerably expands that proposition. Moreover, it would simultaneously increase the volume of consumer preference data the company collects, which can be used to tempt brands into delivering targeted marketing campaigns (not least Amazon itself and its commercial partners).
Second, guessing any company’s future direction is always a hit-and-miss affair. Still, a closer analysis of Amazon’s financial statements gives a strong hint as to where its priorities lie. The US$8.5bn it will pay for MGM is just a fraction of the US$386bn revenue the company posted in FY20. That figure was up US$100bn in 2019, with 38% year-on-year growth driven by a massive surge in the volume and value of goods and services purchased online during pandemic lockdown restrictions. Some estimates now place Amazon as one of the top two retailers in the US, second only to Walmart. Yet while the latter saw its eCommerce sales expand 35% in FY20, overall revenue growth was just 6%.
Amazon’s online sales expanded 40% to be worth US$197bn in FY20, growing their share of Amazon’s total business from 50% to 51% in the process. Sales of third-party seller services grew at an even faster rate up (50% year on year) to be worth US$80bn, taking their percentage of the total up from 19% to 21%. But while turnover from subscription services made up primarily of Amazon Prime components expanded by a healthy 31% to US$25bn in FY20, it still represents only 7% of Amazon’s total revenue, precisely the same as in FY19.
So while Amazon looks on its way to becoming what might be the world’s first digital media giant, its compelling ecosystem of services will ensure that entertainment and shopping are entwined for the growing number of Prime members.
[i] Amazon to Buy MGM, Bagging a Lion to Help Wage Streaming Battle, Wall Street Journal, 26th May 2021