After years of kneeling at the altar of long-term thinking and daring experimentation, Amazon (AMZN -1.40%) It seems like they’re finally getting religion in the end.
The company is cutting costs like never before, throwing the ax at previously promising new ventures like Amazon Care and announcing its first major layoffs laying off 10,000 corporate employees. did. A good chunk of those layoffs are due to the company’s Alexa and devices division, which, according to Business Insider, is losing $10 billion a year to voice-activated technology.
The revelation that Alexa has become a financial quagmire begs the question of what else Amazon is wasting money on. That international business seems to be his one goal of savings. The division, which consists primarily of e-commerce businesses outside of North America, has been loss-making most of the year, posting an operating loss of $5.5 billion through his first three quarters of the year.
Another division that I think deserves more scrutiny is Prime Video, which Amazon doesn’t directly talk about in its financial statements. Aside from a la carte spending on streaming rentals and sales, Amazon doesn’t monetize Prime Video directly, instead using it as a perk to attract Prime members.
The company is estimated to spend $13 billion on video and music content in 2021, and video spending, including sports, will grow to $15 billion in 2022. This outperforms all of its peers. netflix (NFLX 3.14%)was expected to spend $13.6 billion on an amortized basis this year.
Video has only a loose connection to online shopping, so investors should ask if that $15 billion is being put to good use.
Image Source: Getty Images.
prime omics
Netflix or disney (DIS 0.90%), Amazon is nearing its best subscriber metrics. The company now has 200 million Prime members worldwide, according to a letter to shareholders last April.
Amazon charges different prices for Prime around the world, but assuming all of these members paid $139 a year, the annual membership fee would be $27.8 billion. That’s close to her $34.1 billion earned in subscriber fees over the past four quarters. This comes from Prime and other subscription businesses like Kindle Unlimited, Audible, and Amazon Music.
Based on these numbers, $30 billion in Prime revenue seems like a fair estimate. That means Amazon spends half of its Prime membership revenue on Prime Video, and it’s his money that goes toward other Prime benefits like his two-day shipping and free returns, which are the biggest drivers of his membership. Only $15 billion. Amazon also spent $82.4 billion on shipping last year, at least part of which was allocated to Prime.
Of course, the rationale behind spending on Prime Video is that it encourages online shopping on Amazon by signing up new Prime members and incentivizing existing members. “Winning a Golden Globe helps us sell more shoes,” said founder Jeff Bezos of his company’s differentiated approach to Hollywood.
This thinking also explains why the company is investing $1 billion a year. thursday night footballwhich said it led to a record number of Prime signups in three hours.
However, the marginal return on your Prime Video spend may be decreasing at this time. Anyone who shop online often has probably already joined Prime, which has been around since 2005. The relationship between video streaming and online shopping is also tangential. If he spends $15 billion on Amazon improving its Prime benefits, wouldn’t he be better off spending it on faster delivery, better customer service, or lower prices?
There is nothing magical about Prime Video and online shopping.
streaming reality
Amazon is spending more on video at a time when nearly all of its competitors are tightening their belts. Netflix has gone through two layoffs. Disney said it prioritizes streaming profitability over subscriber growth and hinted at possible layoffs. warner bros discovery (WBD 3.07%) He also announced his dismissal.
In other words, the competitive dynamics in streaming are being rectified. Too many companies have entered the space, but are not charging their subscribers enough to offset the cost of their content.
Netflix co-CEO Reed Hastings may have said it best in the company’s recent letter to shareholders. Annual operating income is $10 billion whereas he is $5 billion to $6 billion. ”
Amazon is clearly one of the losing competitors no matter how they explain their $15 billion in content spending. Throwing more money into video at a time when the rest of the streaming industry is noticing that the economy isn’t doing too well seems like a losing battle.
Amazon should be held accountable here, just like its streaming peers. Now that Alexa’s massive losses are clear, investors should demand more transparency about how the company spends its money, including justifying its $15 billion video budget. I have.
The good news here is that there is a huge opportunity for improvement. Amazon has a number of high-margin revenue opportunities, such as Amazon Web Services, advertising, and third-party marketplaces, that could make it much more profitable than it is today.
For Amazon, being conservative with Prime Video spending only makes sense given what’s going on in the industry, and increasing earnings when the stock halves almost certainly makes sense. You will get applause from investors.
The company recognizes that losing money has its limits, so Prime Video deserves a thorough investigation.
