The Math Behind How an Amazon Hit TV Program Contributes to the Company’s ProfitabilityMonday, March 19, 2018, 11:58 AM ET|Posted by Will Richmond
Last week Reuters reported data from internal Amazon documents that for the first time provided insights into viewership of the company’s original TV programs and their contribution to creating new Prime subscriptions. Below I’ve done some additonal math using separately reported information to calculate how profitable at least one of Amazon's original programs could be.
Last October, Fortune reported research from Consumer Intelligence Research Partners indicating that Amazon Prime subscribers spend an average of $1,300 per year compared to an average of $700 per year that non-Prime subscribers spend. (Note, back in Fall, 2016, Morgan Stanley said that according to its survey, Prime subscribers spend nearly $2,500 per year, vs. $544 for non-subscribers). For the purpose of my calculations, I just used the CIRP estimate of $600 incremental spending per year by subscribers.
The Reuters article notes that the Amazon program “The Man in the High Castle” delivered 1.15 million new Prime subscribers worldwide. So, multiplying this by the incremental annual spend of $600 yields $690 million in incremental revenue from these new subscribers. Amazon’s North American e-commerce operating margin in 2017 was approximately 2.7%, so the operating profit on the incremental revenue would have been around $18.6 million (this is rough, because some of the incremental subscriber spend came from international where it is undoubtedly lower and also where Amazon actually still loses money on an operating basis).
In addition to the annual incremental spending benefit, those 1.15 million new subscribers also spent $99 to belong to Prime, which would be another $114 million in annual revenue. The operating profitability of the membership fee is hard to calculate given all the different benefits and their costs, but assume it’s 50%, so the profit would be around $57 million. In total that would mean “The Man in the High Castle” delivered year one profits of $75.6 million vs. its cost of $72 million, or $3.6 million net profit, a 5% margin. But keep in mind this is only year one; as long as Amazon retains these 1.15 million subscribers, the profitability multiplies. In addition, there are further revenue streams derived from Prime members such as add-on subscriptions to video services through Amazon Channels.
Admittedly, the above math is a little rough, and it should also be noted that Reuters’s own reporting hasn’t been independently verified. Still, Amazon CEO Jeff Bezos has been extremely candid about the benefits of video to Prime. In an interview with Recode in mid-2016 (see 37:32 cue point), Bezos said that “When we win a Golden Globe, it helps us sell more shoes,” adding that both Prime’s free trial conversion and annual renewal rates increase when subscribers watch video. He actually cited “The Man in the High Castle” as an example of programming that works really well, no surprise.
The Reuters article points out that not all Prime originals have been equally successful in drawing audience or paying off for Amazon. But, to the extent that Amazon gets better over time with creating programs that drive Prime, the company will strengthen its unique business model for video. As content providers are increasingly challenged by viewers’ resistance to advertising and the limits to how many monthly subscriptions will be adopted, Amazon’s differentiated business model for video should become even more valuable.