Last year Amazon became the world’s largest retailer by market capitalisation, simultaneously achieving annual revenues of more than £100 billon (€127bn) for the first time.  The company’s consistent annual growth, solid market position, firm focus on the future, and extensive infrastructure make it a formidable player.

Ampere’s latest analysis of Amazon’s
Prime business suggests that Amazon can use content to persuade customers to sign up, and offset the content costs against the increased amounts that Prime customers spend on purchasing products. To cover a $1 billion content bill Amazon would need to add just 7 million – 8 million new Prime customers by Ampere’s estimates. But looking beyond the current content offer, the analyst firm believes the recent launch of the Streaming Partner Program (SPP) in the US suggests Amazon is looking further, eyeing the international pay-TV market.

Here’s how the Prime numbers add up:

The facts
•    Amazon’s annual revenue hit $107 billion in 2015, up 20 per cent year-on-year, surpassing the $100 billion mark for the first time. 93 per cent of the revenue, and 82 per cent of the growth, came from retail.
•    Globally, Amazon reached more than 300 million active retail customers in 2015, up 50 million year-on-year. On average, Amazon made $326 in retail revenue from each customer last year.
•    But Prime customers spent almost double this. Ampere estimates that Prime subscribers spent as much as $39 billion (after sales tax) in 2015 – an average of nearly $600 per customer each year.
•    By Ampere’s estimates, there are now 60 million – 70 million Prime subscribers worldwide. Together, they are responsible for more than one third of inbound spend on Amazon’s retail business.
•    Ampere estimates that the extra revenue from Prime customers’ increased likelihood to buy products, plus spend on the subscription, reached nearly $20 billionn in 2015, one fifth of Amazon’s retail revenue.
•    The research suggests that as a result of its success at retail, Amazon can extensively subsidise content acquisition by up to $130 per new or retained Prime customer each year. And the better the content, the stronger Amazon Prime’s appeal to new subscribers.
•    As a result, if the company wanted to spend $1 billion in a year on acquiring video content, the impact would be neutral on Amazon’s retail operating income – providing it could upgrade an additional 7 million – 8 million customers to Prime. The ~$2 billion that Ampere estimates Amazon spent on video content last year would have only required 15 million Prime upgrades/retentions to justify.
•    This content spend is crucial to driving growth. In 2015, Amazon’s retail revenues grew by nearly $15 billion. We estimate that nearly $12 billion of this came from Amazon Prime customers, and that as much as 40 per cent of Amazon’s retail growth in 2015 can be attributed to incremental spend – consumers upgrading to Prime and spending more with Amazon than they did previously.
•    So as Amazon’s revenue from physical media products such as books and CDs declines in Europe and dwindles in North America, Amazon Prime’s subscription delivery and content service has been helping to maintain and grow revenues.

Richard Broughton, Director at Ampere Analysis, says: “Amazon is known for eschewing shorter term shareholder desires for profitability, to focus on investing to improve the longer term business position. Its backing of Prime, launched in 2005, is paying off. Simply put, Amazon can justify spending on content that supports adding and retaining Prime subscriptions because these customers spend over twice as much on other items.”

How much is a Prime customer worth to Amazon?
How much can Amazon be justified in spending on content to retain and attract new subscribers to Prime? Ampere calculates that the incremental income effect of upgrading an existing customer to Prime ranges from $100-$130 a year. Adding an entirely new customer to Amazon’s systems could be worth as much as $160.  This means that for every ~$130 that Amazon spends on content there will be no net negative effect on retail income after sales and fulfilment costs – providing it can either sign up a new Prime customer or retain an existing one.

Going up a Gear: The Grand Tour
Alongside Amazon’s latest (Q1 2016) financial results, the retailer indicated that it would be “significantly” increasing spend on content through the rest of 2016, underlining the positive impact that adding content to Prime has had on boosting retail spend.

The company has also made major investments which have yet to be felt by the market. Amazon famously hired the former BBC Top Gear presenters, commissioning three series of The Grand Tour motoring show for a total of $250 million. At $83 million per season, Amazon needs to add (and keep) just 0.6 million – 0.8 million new subscribers to justify the investment. In the UK, it has discounted the annual membership fee from £79 to £59, alongside the promotion of the motoring show, suggesting that the retailer trusts that net new customers and their associated increased retail spend will offset any downsides to the promotion.

An eye on pay-TV?
Launched in the US in December 2015, the Streaming Partner Program (SPP) makes third-party services available to subscribers, who can add them to their existing Prime package for a further monthly fee. Effectively a managed online video service platform for content owners and distributors, Amazon handles infrastructure, billing, customer service and marketing.  SPP now contains 46 partner subscription services in the US from players including premium veterans Showtime and Starz, as well as newer standalone OTT offers such as A&E’s History Vault, NBCU’s comedy service Seeso, and niche SVoD plays like CuriosityStream, AcornTV and Shudder. An international launch appears imminent.

Richard Broughton, Director at Ampere Analysis, explains: “The significance of the SPP goes far beyond the retail uplift incentives that the core Prime offer drives. At Ampere, we see it as an early à la carte next-generation pay TV offer. New services are being added regularly, and we believe it is only a matter of time before these are bundled into larger and more expensive packages – akin to traditional pay TV tiers. So while Prime allows Amazon to subsidise content acquisition, the retailer is also slowly building out what could very well be the template for future pay-TV services.”

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