While most people focus on the features of Amazon Fire TV and the related Prime Video platform, in reality, the intriguing elements are behind the scene. Last time, we have identified 10 business models for Amazon’s Kindle platform.
Today, we will see that Amazon Prime Video, too, has 10 business models with six having an equivalent in Amazon Kindle and four being different. My focus today will be on the Prime Video business models that are different to those of the Kindle platform.
(1) The installed base: Fire TV
Fire TV is the physical device that people use to connect to the Prime Video platform. Amazon has made it a very non-shiny gadget if I may say this. They want a low-cost (to produce), low-price (to sell) device that conquers a large installed-base through which they distribute content.
- Fire TV Stick: very basic but sufficient to access the Prime Video platform
- Fire TV and Fire TV Cube: More enhanced versions that include voice control and other features
- Fire TV Recast: allows recording live TV (like a good old VCR recorder but more advanced)
- Fire TV in-built TVs: manufacturers that have included the Fire TV components directly into the TV thus not requiring any of the above components
- Accessories/extensions: quite limited overall, but most notably, there is a bundle of Fire TV Stick with a remote and Echo Dot for voice control
From a business model perspective we note the following:
- Retail model: Direct sales of the physical components through Amazon’s own online retail platform and through other retailers. Prices of the components are low to expand their installed base. Prices of the consumable items too are in the same range as their competitor’s pricing. With this, the content likely comes at a higher margin than the hardware. In the case of Fire TV and Prime Video, it is not necessarily about the data or the platform as such (as is in the case of Kindle) but more about the overall Prime subscription
- Partnering business model: The integration of the Fire TV components into TV manufacturer’s hardware is a partnering business model for the purpose of gaining a larger installed base
- Stimulation of consumption: Amazon has bundled Fire TV Stick and Echo Dot. Normally, I would classify this under the bundling business model. But there is another, more important, motivation here. And that is to ease the use of the Fire TV Stick via voice control, to get TV users on the AI platform (covered next time) but also to stimulate consumption of Prime Video through the easier (voice) control of Prime Video
- Bundling business model: the main motivation behind Prime Video and Fire TV are the bundling with Amazon Prime – see more below
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(2) The Platform: Prime Video
Even if Amazon is the biggest retailer for DVDs, Blu-ray, etc, it may not mean much if over time most of movie consumption spending moves into streaming. And that is how it looks like. This explains why Amazon has been moving into the streaming business early on. The US is the leading edge of a secular move of media consumption from physical owned-devices to streaming. You can see how the physical formats shrank by 14% year-on-year in 2017 alone.
Content distribution infrastructure
So called, content delivery networks (CDN) ensure video streaming at acceptable speeds. These are powerful local servers (Amazon has over 100 of these in various countries) that cache streaming (and other content). Amazon has built their own CDN infrastructure (rather than using existing ones), called Amazon Cloud Front.
“Amazon CloudFront is a content delivery network (CDN) offered by Amazon Web Services. Content delivery networks provide a globally-distributed network of proxy servers which cache content, such as web videos or other bulky media, more locally to consumers, thus improving access speed for downloading the content.”
Amazon then offers this infrastructure also to others to use on a pay-per-use basis. This is the same business model principle that they use for their package delivery network in form of Shipping With Amazon (SWA) and Fulfilment by Amazon (FBA).
(3) The content: connecting the multi-sided platform
Here are some important things to know about the Prime Video content. It includes:
- Amazon Originals (TV series and movies)
- Non-Amazon movies and TV shows
- There is a total of >20,000 items to buy or rent the same way as you may know from iTunes or Google (without Prime subscription) and pay by item
- You can access a large subselection of >6,000 items as part of the Amazon Prime subscription, $12.99/mth or $120/yr, which includes free shipping, etc
- In some countries, Prime Video is only available as part of the overall Prime subscription. In other countries, they can be separately accessed
- Amazon Originals are only available through Prime Video
- You can subscribe to entire channels, such as CBS, HBO, Cinemax and many others for an additional $5.99-$14.99/month per channel (known as over-the-top media services)
- Further, Fire TV also can be used to access ones Netflix, Hulu and other streaming accounts
- Importantly, Prime Video does not have user-generated content like YouTube (I will cover Twitch another time)
With this, you now know the type of platform being business to consumer (B2C) and it is not connecting consumers to consumers (C2C). It is connecting various sources of commercial content creation with consumers. Amazon Prime Video is a tightly controlled platform business model based on the fact that there is no way for independent creators to publish content as is the case in Kindle (or app stores, etc).
Importance of original (exclusive) content
Original content is important to attract subscribers. “Our results indicate that if a streaming service wants to attract subscribers, offering content from TV channels is not a sufficient strategy. Building on this insight, we found that offering original content can be one important way that streaming services can differentiate their offerings from competitors,” reads a recent study published on Harvard Business Review, HBR.
Amazon original content
Amazon has become a producer of their own shows and is an owner of many studios. Original content equates to exclusive content and that draws subscribers. The only way to stream Amazon’s original content is through a Prime Video (or Prime, depending on country) subscription. Where Prime Video can be subscribed on its own, the pricing tactic is to make it not much cheaper than the overall Prime bundle that includes many additional benefits at low incremental fees.
The free shipping that comes with the overall Prime bundle stimulates demand, a strategy Jeff Bezos famously summarised as: “When we win a Golden Globe, it helps us sell more shoes.”
Amazon Studios and original content
A couple of call outs on Amazon studios and content:
- Amazon Video has a long list of Amazon Originals which are exclusive on Prime Video. Many seem to have been canned after the first season which shows their strong data-driven experimentation, rather than a fire-and-forget approach
- They have also purchased the rights of existing shows to exclusively air them in other countries (and with some gap re-stream them in the originating country)
- And of course, they have the usual (mainstream) movies and series
Amazon’s sourcing of scripts is remarkable and very different from most other studios. They allow independent creators to submit their story to Amazon via a dedicated portal (remember KDP?). From there it becomes a commercial process owned by Amazon. It includes early prototyping and testing at their premises with small audiences to determine the prospects of the script. Amazon Studios pays successful writers progressing levels of royalties. (Note, there was news earlier this year (2018) that this portal would be shut down by mid-year but it is still open for submissions, so I assume they have changed their mind back on this.)
The metrics: Cost per first stream
To be able to assess the profitability of the customer we would need to know their lifetime value. But Amazon does not share such numbers. Despite not having this data, we can still see that customer acquisition via this channel comes at considerable costs for most of the shows. Look at the shows with $500-$1500 cost per first stream (equal to 4-12.5 years of Prime membership fees). Jeff Bezos seems to indicate that Prime Video viewing Prime subscribers have a higher propensity to renew their Prime subscriptions and generate revenues through Amazon’s other offerings.
The costs are also high in absolute terms, examples:
- $5b per year for original and licensed content
- The production costs for the 2 seasons of “Man in the high castle” seem to have surpassed $150m
- Amazon has bought the global television adaptation rights for “Lord of the Rings” for $1b – this is before any production or any other costs
Despite the cost, the importance of original content is seen in that 31% of their subscribers were watching Amazon original content more than any other content. This was by the end of 2016 with the trendline increasing.
Demand-side: user segments
A look at the user segments that use streaming does not reveal any surprises. It is strongly used by younger, more-affluent audiences.
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More entry points
The Fire TV devices are not what the business model is about despite being the entry point to the whole ecosystem. But the cost of these components is low and thus switching costs remain moderate. Gone are the days of powerful lock-out effects that once a decision PC vs Apple computer had.
The reverse is equally true in that Prime Video is available through all sorts of other devices:
- Apple iOS devices
- Android iOS devices
- Amazon Fire Tablet
- Smart TVs
- Blu-ray players
- Set-top boxes (e.g. Roku, TiVo)
- Game consoles (e.g. PlayStation, Xbox, Wii)
Amazon Prime Video’s business models
Here are the business models associated with Amazon Prime Video:
- Online retail business model: Sales/rent of movies/TV series that are not available as part of Prime Video
- Razor-and-blade model v2.0: The required hardware is sold at low/no margin, expensive content is created and then provided for free all for the goal of getting people to sign up to the overall Prime bundle
- Platform business model: a multi-sided platform with various supply side actors providing content (studios, channels, Amazon original, etc) and various demand side segments
- Premium/extensions retail model: more premium versions of, e.g., the hardware are available at a higher price points as well as extension and Amazon care products (which really is a service business model)
- Bundling/cross-/up-sell: all sorts of bundling, cross- and up-selling of individual titles
- Subscription business model: Subscription to individual channels
- Partnering business model: The integration of the Fire TV components into TV manufacturer’s hardware is a partnering business model for the purpose of gaining a larger installed base
- Stimulation of consumption: making it easier to use Prime Video via in-built Alexa voice control (plus it adds more users to their virtual assistant platform)
- Bundling business model: Bundling of Prime Video into the overall Prime subscription (which then has several offshoots itself)
- Pay-per-use: usage of the streaming and other internet content delivery infrastructure (Amazon CloudFront)
The strategic view
Here is how it looks all in one view.
We can assume with some certainty that the two key strategic objectives of Prime Video are:
- To make the overall Prime bundle more attractive and to acquire new customers into Prime
- To participate in the growing market of distribution of media via the internet rather than via physical media
There are many similarities between the Kindle and the Prime Video platforms But the differences are actually more interesting as you have seen. We will continue our journey through the Amazon platform businesses and you will find that they all are somewhat different from their business purpose which makes them so intriguing to analyse them.
So, stay tuned!
This article by Murat Uenlue is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.