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Amazon's very, very, very expensive gamble really did pay off
Published by
Forbes

3m read

9 April 9.04am

Hargreaves Lansdown is not responsible for this article's content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest. Article originally published by Forbes.

Streaming services like Netflix and Amazon have very different metrics for success than traditional broadcasters. With TV it’s easy to predict what shows will get cancelled and which will be renewed based on their viewerships. Streamers, on the other hand, already have your money and so ratings aren’t as important but shows on Amazon and Netflix do get cancelled, so why? Well Reuters got an interesting insight into Amazon and how it categorises shows, thanks to some documents it has seen.

Firstly, Amazon looks at its Prime video roster as a way to lure more people onto the Prime subscription service. Prime probably doesn’t make a lot of money itself, but Prime customers spend a lot more on Amazon than non-Prime customers. But of course Amazon would love more subscribers for its service, and so looks at how shows pull in customers.

Jeff Bezos described Clarkson, May and Hammond’s Grand Tour as “very, very expensive” but it turns out that it also brought more subscribers to the service than pretty much anything else. Amazon calls this the “cost per first stream” and it’s basically the amount of money a season of a show costs, divided against the number of people Amazon thinks it brought to the service.

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People tend to start at season one of shows like “The Grand Tour” and the very popular “The Man In The High Castle” so the cost per first stream metric sort of breaks in the second season. Although for the show in general it’s possible to see who subscribed and what show they then watched first. Anyway, The Grand Tour was enormously expensive - about £35m per season seems to be a ballpark - but it brought in so many new viewers that it was well worth it.

Reuters says that The Grand Tour garnered 1.5million “first streams”, meaning it was the first thing a subscriber watched. The maths of this means it therefore cost $49 per new customer. A new customer spends $99 on a prime membership in the US, it’s a little more expensive in the UK, at $111 (current exchange rate). So the argument is that The Grand Tour cost about half of the yearly prime membership of those who signed up, but those customers would also end up spending more money with Amazon in general. The Grand Tour then, is a good use of Amazon’s money. Of course some customers might marathon a series in their free trial month, and then cancel their subscription. It’s not clear if Amazon removes these numbers, but it’s certainly within its power to do so.

Shows like The Good Girls Revolt seem much less useful. The first season only brought in 52,000 new customers and had a huge production budget of $81 million. It’s viewership was healthy, at 1.6 million but the cost for that all-important “first stream” was $1560, according to the documents seen by Reuters. While that doesn’t seem to offer a lot in new customers, the cost per viewer was still reasonable. Amazon didn’t renew this show though, showing that the CPFS does have some sizeable impact on its decisions.

Amazon will be hoping that it’s new $500,000,000 Lord of the Rings show will bring in staggering numbers of new customers. To spend half a billion on a TV series is a staggering commitment and Amazon will want to convert that to lots of people paying for Prime and buying toothbrushes, TVs and presumably, high-profit margin products like Amazon’s own hardware – to play the shows it produces.

Additional information in this article came from the Parrot Analytics report “Amazon’s internal numbers on Prime Video” which is available to download via its website.

This article was written by Ian Morris from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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Article originally published by Forbes. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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