Why the big investments
The Europe-based LOVEFiLM is already a leading subscription video provider in the region with more than 2 million subscribers, and a content-base of more than 70,000 titles. However, LOVEFiLM has been surpassed by the increasingly dominant player in the space, Netflix in the region. However, LOVEFiLM will enable Amazon to market and distribute its original shows throughout Amazon’s main locations in Europe, which in turn will expedite the subscription revenue from Amazon Prime.
In 2012, Amazon.com, Inc. (NASDAQ:AMZN)’s sales from the U.K. and Germany made up 25% and 33% of the company’s total International sales, as a result, LOVEFiLM’s positioning in these two countries will aid Amazon significantly to get more subscribers to watch original shows from the Prime service for an annualized fee of $79.
While the TV Shows might not be big budget or might not be of the same quality as the production of competing firms like Netflix, Amazon’s investments in adding more video content should drive down the churn rate of the Prime service in the future.
Amazon’s prime subscribers are doing a lot of cross-shopping on the company’s massive platform. When customers take on the Prime Service, the customers tend to shop a lot more from Amazon to take advantage of the unlimited 2 day shipping service which leads to more incremental revenue for Amazon.com, Inc. (NASDAQ:AMZN) from its retail operations as well as the Third Party business of the company.
Tablet Strategy
Amazon’s MP3 offering has been updated to enable Apple users of iPhone and iPad to purchase digital music from Amazon’s music catalog which stands at a very respectable 22 million songs. Amazon has been ramping up its footprint in the digital music area to supplement its tablet offerings. Amazon notched up a market share of 22% in the digital music download space in the U.S., according to the NPD Group.
However, Apple’s iTunes still leads heavily with a 63% piece of the pie, largely due to the first moves status and the 500+ million registered users on iTunes. However, Amazon has been investing heavily to enhance its digital music footprint and it is paying off, as the company had only 7% market share back in 2008, according to the NPD Group.
Apple’s iTunes still heavily controls the market for home digital videos, in both electronic-sell through (EST) and Internet video-on-demand (IVOD). According to the NPD Group, Apple’s share of EST and IVOD stood at 67% and 45% in 2012, whereas Amazon stood at 10% and 18%.
So it is rather evident that Amazon’s big investments in content are to expand the breadth of its ecosystem to get more tablet owners to buy more content. And just recently the company announced the expansion of its Appstore in ~200 countries to ramp up its content sales, and that the Kindle Fire will be sold in more than 170 countries. Amazon’s customer list of more than 209 million provides the company a sizable advantage due to its scale and installed user base.
The Bottom Line
Jeff Bezos himself addressed the investor concerns regarding the company’s big investments, and stated that the company’s long-term approach still holds true. And Amazon.com, Inc. (NASDAQ:AMZN)’s media head, Bill Carr, stated that the firm will be looking to sign more exclusive shows down the road, which will lead to more incremental investments. While the return from the recent entertainment bets may not have materialized right away, in the long-run these investments widens the company’s durable competitive advantage by appealing to more customers.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, and Netflix.
The article Amazon: Betting Big On Entertainment originally appeared on Fool.com.
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