Author
Colin Dixon
Date
June 29, 2011

Last week Amazon announced that Prime members could stream an additional 1,000 major movies and TV shows for free. So far the selection has been lackluster, to say the least. So the addition of shows such as Terminator: The Sarah Connor Chronicles and movies such as The Right Stuff and Superman: The Movie will, I’m sure, be welcome by members—me included.

But what really caught my attention was the immediate leap made by the press that Jeff Bezos— Amazon’s long-time CEO—is gearing up for a grand showdown with Netflix. I don’t think this is the primary motivation for Amazon at all. This is not an offensive play against Netflix, but a defensive move, plain and simple.

To understand why this is the case, we must step back a bit and look at the changing nature of Amazon’s business.

Amazon Prime is a membership program designed to make a large swath of merchandise in the store eligible for “free” 2-day shipping. With a $79 annual membership, one can buy books, CDs, and movies on Wednesday and know they will be received in time for weekend. Details are scant on the success of the service, but Piper Jaffray estimated there were two million Amazon Prime members in mid-2009 with the program growing 24% year over year. Further, PJC estimated that after joining the program, members more than doubled their annual spend to $900. Clearly, Prime does a great job of making members favor Amazon over other online vendors.

Over the last several years, there have been some big changes at Amazon. Since its introduction of the Kindle in 2007, Amazon has helped usher in a new era in the consumption of books. In just four years, Amazon customers have fully embraced the Kindle and electronic delivery; so much that in May of this year, Amazon’s sales of ebook sales eclipsed physical book sales for the very first time.

As well, the delivery of movies and TV shows appears to be undergoing a similar transition, be it at a much slower pace. Industry initiatives such as Ultraviolet and EIDR are aimed at fixing the problems with digital movie sales that has to date held the business back. Given the ease and convenience of digital delivery, these efforts will ultimately get solid footing and, consequently, video disc sales will fade (as have CD sales) due to uptake of standardized digital music streaming and downloads.

The core value proposition of the Prime program is free 2-day delivery of a purchase. But this provides less and less benefit to consumer as they switch to digital delivery of media. In other words, the selling point of Prime is under attack. And this brings us to the core issue facing Amazon. If shoppers drop the Prime program, they will have less reason to shop at Amazon. Would you expect Jeff Bezos to stand idly by while his best customer program fades before his eyes?

Subsequently, adding value to Prime at this particular moment makes good business sense. Specifically, adding free video streaming is an extremely smart move that also helps other parts of Amazon’s business.

For example, Amazon introduced Amazon Unbox—an electronic movie rental service—in 2006 and rebranded it Amazon Video OnDemand in 2008. The service is now available on many smart TVs and devices such as TiVo and Roku. However, nothing approaching the success of the Kindle seems to be happening in digital video rentals—at least not at Amazon. Why is this? One reason could be that consumers simply are not used to going to the service to watch video. Free video has certainly gotten tremendous usage for cable operators such as Comcast. The company reports that 350 million programs are viewed each month, the vast majority of which are free. Adding free video to Prime will get people into the OnDemand site and help make it part of their regular video “channels.” Once they are using the service, searching for a movie uncovers both free Prime content as well as rental titles. In this context, the availability of free content should help bring consumers back to the service and stimulate demand for the pay stuff.

Getting people using Amazon Video OnDemand is very important to the company’s future. Like BestBuy and Walmart, Amazon has a robust business selling movies on physical discs. With the slow but inevitable march toward digital movie sales and rentals, Amazon stands to lose a large part of its revenues. Developing a digital video purchase and rental business is critical to Amazon’s core business.

So, there are some very good reasons Jeff Bezos is investing in free video for Prime members. But these reasons are primarily to defend existing revenues, not to take on Netflix.

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