Amazon at 20: Redefining Home Entertainment

19 Oct, 2015 By: Erik Gruenwedel

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Amazon this year celebrated its 20th anniversary doing what it does best — selling stuff, lots of stuff, notably in home entertainment.

The inaugural “Prime Day” retail event (July 15), honoring its Amazon Prime membership loyalty program’s 10-year anniversary, resulted in the company selling more discs than its record Black Friday haul last November. Prime members ordered 34.4 million items across Amazon’s Prime-eligible countries, breaking Black Friday records with 398 items ordered per second. In the United States, the top-selling title was The Lord of the Rings: The Motion Picture Trilogy from Warner Bros. Home Entertainment. In Canada, the Breaking Bad: The Complete Series Barrel (Sony Pictures Home Entertainment) ranked among the most-coveted boxed sets.

“We sold enough ‘Breaking Bad’ DVDs that it would take over four years to watch them back-to-back,” said Alexandre Gagnon, country manager for Amazon Canada.

Indeed, Amazon sold about $10 billion in media product, which includes books, music, movies, TV shows, video games and consoles, software and digital sales (Amazon Instant Video), including more than $5.5 billion in North America, through the first six months of the year, according to company financials. The media segment accounted for 19% of Amazon’s $13.8 billion North American second-quarter quarterly revenue, which was up 6% from the previous-year period.

Packaged media and Prime Instant Video, Amazon’s digital service offering movie and episodic TV streaming and purchase, are integral parts of the Amazon offering, making the $99 Prime retail membership, which offers free shipping, more appealing. That, in turn, keeps the customer within the Amazon environment, said Dan Cryan, research director of digital media for IHS.

“Amazon — through Prime Instant Video — has found the digital equivalent of putting DVDs at checkout in traditional supermarkets,” he said.

An innovator in many businesses, Amazon has become a key player in the home entertainment market as well, both in the digital and physical realms. Amazon is the No. 2 customer for the home entertainment studios, according to one studio insider, behind only Walmart.

A Global Business

Established in a Seattle garage in 1995 by Jeff Bezos as an online bookseller (first sale: Fluid Concepts & Creative Analogies: Computer Models of the Fundamental Mechanisms of Thought), Amazon over the years has evolved into a multifaceted global retailer.

Along the way, the company trademarked “1-Click Shopping” (started in 1997) into a business blueprint supported by both in-house and 2 million-plus third-party sellers in the United States, Canada, the United Kingdom, Italy, Germany, France, Costa Rica, China, Spain, Brazil, Holland, Luxembourg, India, Ireland, Japan and Mexico.

“Amazon is a unique and vital partner that offers one-stop shopping for home entertainment across platforms,” said Bob Buchi, worldwide president of Paramount Home Media Distribution.

The company launched its first DVD/VHS video store platform in November 1998, followed by the debut of similar packaged media online stores in the United Kingdom, France and Germany in 2000; Japan in 2001; Canada in 2002; Italy in 2010; and Spain in 2011.

“Amazon has made an indelible mark in advancing the global home entertainment industry across both the physical and the digital spectrums,” said Eddie Cunningham, president of Universal Pictures Home Entertainment.

Notable to the German and U.K. markets was Amazon’s launch of by-mail DVD rental businesses in 2005 and 2004, respectively. In 2008, LoveFilm, a U.K.-based provider of DVD-by-mail and video-on-demand service, acquired Amazon’s DVD rental businesses, and in return Amazon became a minority shareholder of LoveFilm. Amazon acquired LoveFilm outright in 2011, which then also included video game and streaming businesses.

In 2012, Amazon Germany bowed a trade-in service for DVD and Blu-ray Disc titles enabling users to receive store credit for used discs.

In 2014, LoveFilm discontinued its VOD business and rolled it into Amazon Instant Video. Amazon then rebranded LoveFilm Instant, the service’s upstart streaming service to Prime Instant Video in an effort to compete with Netflix, which had entered the United Kingdom in 2011, and other European markets in 2013. Prime Instant Video currently operates only in the United States, United Kingdom and Germany.

Product and Tech Diversity

Meanwhile, Amazon innovated in all sorts of other ways in the media business. Over the years the company introduced myriad consumer electronics products and services — most with the goal of upping media consumption.

Notable products over the years include the Kindle Fire tablet, Paperwhite e-reader, Fire TV media player, Fire Phone, Amazon Studios, Amazon Instant Video, Prime Instant Video, Internet Movie Database, AWS data storage and distribution, and a possible online TV service, among other offerings. All of these items featured the singular goal of connecting the consumer seamlessly with Amazon’s products, goods and services.

“Amazon has a strong history of consumer-empowering innovations, and their commitment to advancing the consumer digital experience is a testament to their innovative culture,” said Mike Dunn, president of 20th Century Fox Home Entertainment.

Amazon this year has seen its share price increase more than 75% in value, resulting in a market cap that is 30% higher than retail behemoth Walmart. Just three years ago Walmart’s revenue topped Amazon sales nearly 16-fold. That revenue gap has now shrunk to five-fold. From an overhead perspective, Amazon reportedly generates three times the revenue per employee ($623,000) as Walmart does — much of it due to technology.

Prime Instant Video

Launched in 2005 as a $79 annual loyalty program (now $99) offering free two-day shipping on most products, Prime added streaming access to movies, TV shows and music in 2011 and 2014, respectively.

Chicago-based Consumer Intelligence Research Partners (CIRP) estimated Amazon ended June with about 44 million Prime members. Amazon, per policy, doesn’t reveal actual Prime membership data, but Prime members buy 70% more per year ($1,200) than non-Prime members ($700), according to CIRP.

"I would say that [Prime is] one of the most significant innovations," Kirthi Kalyanam, director of the Retail Marketing Institute at Santa Clara University's Leavey School of Business, told CNET.com.

In addition to shipping and streaming, Prime’s willingness to match Netflix’s billions spent on content licensing underscores an enduring competitive strength, says Wedbush Securities’ Michael Pachter.

In an Oct. 15 note, the analyst said investment in original and exclusive video programming, in addition to Prime Music, should drive Amazon’s content spending upwards of $3 billion this year, with an additional $1 billion per year going forward.

As the over-the-top video market gains a greater share of pay-TV eyeballs, Prime Instant Video is the only SVOD service that can effectively challenge Netflix’s global aspirations, said Pachter.

“Notwithstanding occasional misses from both Amazon and Netflix, we think more hits are forthcoming, and we anticipate accelerated investment into original series and increased competition as a result,” he said. “It is only a matter of time before consumers consider [Prime Instant Video] a viable alternative to Netflix.”

At the same time, Amazon is not tied strategically to making money directly from Prime subscriptions as Netflix is from monthly subscribers — a key distinction, according to Cryan. The analyst said that if the value of a shopping cart is higher from a Prime customer, then increasing content spending on Prime Instant Video is justified.

“Prime Instant Video seems to have a halo effect on the rest of the e-commerce store,” Cryan said.

Amazon Studios

Amazon innovated again in 2010, launching Amazon Studios, its foray into original content creation. Naturally, Amazon approached film production differently than the traditional Hollywood script. Amazon Studios enticed wannabe filmmakers with nearly $3 million in funding for submissions developed as commercial feature films under its first-look deal with Warner Bros.

“We hope that Amazon Studios will help filmmakers experiment and collaborate, and we look forward to developing hit movies,” Ray Price, director of digital product development, said at the time.

It would be five years until Amazon Studios approved its first original motion picture production. In July, the studio announced that Spike Lee’s next film, Chi-Raq, would be its first-ever Amazon Original Movie produced.

In the meantime, Amazon (and Hollywood) focused on episodic programming, in large part due to the success of Netflix’s slate of original TV productions, including “House of Cards” and “Orange Is the New Black.”

In 2012, Amazon Studios established the concept of streaming pilots publicly, approving complete series runs based on viewer feedback. It announced plans to produce pilots for six original comedies, including politically themed “Alpha House,” starring John Goodman, among others. The show concluded its second season in 2014. The year before, Prime Instant Video greenlighted original children’s pilots “Tumble Leaf,” “Creative Galaxy” and “Annedroids.”

Current dramas include L.A. cop series “Bosch”; “Hand of God,” with Ron Perlman; “Red Oaks”; “The Man in the High Castle”; “The New Yorker Presents”; “Mozart in the Jungle”; and “Catastrophe.”

Earlier this year, Amazon announced it signed Oscar-winning director Woody Allen to write and direct his first TV show ever. “Untitled Woody Allen Project,” a half-hour series, will be written and directed by Allen.

Amazon then struck gold with dark comedy “Transparent,” starring Jeffrey Tambor and Emily Robinson and Gaby Hoffmann. The half-hour episodic show about a transgender parent this year won five Emmys, including lead actor (Tambor), guest actor (Bradley Whitford) and directing (Jill Soloway). The series also won Golden Globes for Best Performance by an Actor in a TV Series (Tambor), in addition to Best TV Series — Comedy or Musical.

To honor its Emmy wins, Amazon offered for one day only $67 Prime memberships on Sept. 25 — 32% off the standard $99 annual fee.

“This has been an incredibly exciting year,” said Michael Paull, VP of digital video for Amazon.

A Fierce Competitor

With its large footprint in the retail landscape, Amazon does not shrink from playing retail hardball. Earlier this month Amazon, in an announcement to The Washington Post (which Bezos owns), said, beginning Oct. 28, it will no longer sell streaming media devices that didn’t accept Prime Instant Video. This includes Apple TV and Google Chromecast.

"Over the last three years, Prime Video has become an important part of Prime," Amazon said in a statement. "It’s important that the streaming media players we sell interact well with Prime Video in order to avoid customer confusion."

When asked about the potential for conflict given Netflix’s dependence on Amazon Web Services (AWS), Netflix CEO Reed Hastings, in the company’s Oct. 14 fiscal webcast, said he could not be happier with the “attentiveness” Amazon has given its account.

“They have always kept [AWS] separate from Amazon retail,” Hastings said, adding that Netflix has had “up and down issues” with Amazon retail over the years, which included not being able to run ads on IMDb.

“That never spilled over to AWS,” he said. “Now, we have a really good relationship with Amazon retail also.”

Amazon has also shown a willingness to play hardball with studios. It went proactive in 2014, separately withholding preorder options on new releases from Disney and Warner in an effort to secure better distribution terms.

Preorders for Muppets Most Wanted, Captain America: The Winter Soldier, Million Dollar Arm and Maleficent, in addition to The Lego Movie, 300: Rise of an Empire and Transcendence, among others, were unavailable.

While not a big issue to casual consumers, it was a factor to Blu-ray Disc aficionados and collectors — many of whom took to social media to vent their frustrations. It marked the first time Amazon had halted disc — not digital — preorders as a negotiating tactic.

Amazon employed similar tactics with book publisher Hachette, which ran afoul of then Comedy Central host Stephen Colbert, whose books are published by Hachette. He railed against Amazon on an episode of “The Colbert Report.”

“I’m not just mad at Amazon; I’m mad Prime,” Colbert joked. “They’re fighting with my publisher … and Amazon is playing hardcover.”

Not blocking early digital movie sales was no oversight by Amazon.

IHS analyst Cryan said the e-commerce giant’s dominance in packaged-media sales hasn’t yet transferred to digital, where he says Apple iTunes is projected to control more than 50% of the market this year.

He contends the digital sellthrough business is fundamentally tied to device ecosystems, unlike physical, which has traditionally been linked to brick-and-mortar retail.

“That’s primarily because of the success of Apple hardware [i.e. iPhone and iPad] ecosystems,” he said. “The digital market behaves differently from the physical market for purchasing.”

Amazon eventually struck new deals with the studios and Hachette. In a post regarding Hachette, Amazon justified its tactics, saying "negotiating for acceptable terms” is “critical to keeping service and value high for customers.”

Analyst Cryan agrees.

“Amazon, as a whole, has disrupted many forms of traditional retail, including home entertainment,” he said. “The scope of the company should never be underestimated.”

 

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