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Amazon (NASDAQ:AMZN) finally closed on the Metro Goldwyn Mayer library deal. There are two important points I am taking away from this event:
Anyone who has read past media articles of mine knew I was going to say both of those things (and if not both, then certainly point number two). I would argue it’s for good, shareholder-value-related reasons.
People purchase annual subscriptions to Prime primarily for the shipping discount. It’s an understandable, valuable strategy for the online retailer, one that creates a synergistic ecosystem.
The video service, however, could, and should, be looked at by management as a product that could stand on its own instead of merely as an added-value benefit to convince on-the-fence consumers about taking the plunge and paying up well over a hundred bucks based on a personal bet that enough orders will be generated to justify the annual investment cost.
The company reported it had 175 million subscribers to Prime shipping that use its video service. Netflix (NFLX) has over 220 million members; they don’t get shipping discounts, of course – instead, they receive buzz-worthy original content.
What this shows is that Amazon needs to create more perceived value for the service so as to more firmly establish itself in the streaming marketplace and to ensure that it will always be one of the services people feel they need to keep in the era of declining linear bundles.
Because shipping seems to be the primary reason for subscribing, Amazon’s approach to Hollywood has been volatile. Some years ago, the company at first attempted to keep content creation economically sound by seeing if it could, at least in some part, buy scripts from unknown writers on its experimental Amazon Studios platform (I uploaded a few screenplays there myself). When the company found that running contests and paying out rewards to a lucky few on an online development slate didn’t really do the trick, it ditched the program and doubled down on the conservative route and hired established execs/tastemakers to put together a feature-length/episodic slate. Since then, there have been some hits and some misses, but the company still seems to be searching for its own Stranger Things moment.
And that’s what Netflix has over Amazon: first-mover advantage in content and brand equity. Netflix has become a bona fide platform that can showcase shows and give them a better chance at succeeding…and Netflix turned into such an effective platform because it was built on the back of a lot of content investment. Amazon still needs better content (and I define the term better as meaning pop-culture defining, zeitgeist-making) before its own platform effect can take over.
There are two ways to do this, of course: internal investment, or external investment via acquisition strategies.
It’s hard to say if Amazon is in acquisition mode right now for media assets (although I do think the overall consolidation thesis remains for the industry, and that Amazon should in fact continue to look for assets), but buying MGM is certainly a step in the right direction if transformation of its video offering is a managerial priority.
When the transaction was first announced, the press release indicated that Amazon would focus on making new iterations of legacy IP. There’s a lot to choose from, with Rocky and Robocop serving as just two examples.
The company is well-positioned to cross-promote its online retail businesses with related merchandise from reboots/prequels/sequels to MGM product. This is one advantage over Netflix.
However, Netflix is the giant in the space, so Amazon has some catching up to do. Make that, a lot of catching up.
There’s no way around the fact that Amazon has run the Prime Video brand as a perquisite to the shipping product. More marketing will be needed to change the brand-equity orientation in the minds of consumers, especially younger demos that have been raised in the Netflix era.
Amazon could also compete with Netflix by offering an ad-supported version of its streamer. With Disney (DIS) getting into that mix, and Amazon firmly in the advertising business with IMDB TV, it would seem a natural fit to use MGM product to fuel a multiple-tier strategy.
Metro Goldwyn Mayer isn’t just about movies and episodic for streaming; it’s also about IP for the multiplex, whether it be an indie experiment or a tentpole designed for all demographic quadrants.
Granted, this has been a puzzling thing for me concerning Amazon, and even Netflix, for some time now. I fully comprehend the focus on streaming, and in Amazon’s case, I get that the company doesn’t want to diversify into something as volatile as a Hollywood-based model without doing its due diligence.
But, such due diligence should have concluded a long while ago. Amazon has made film acquisitions – e.g., Manchester by the Sea – but something like the latter isn’t really what I’m talking about.
What I mean is this: the company needs to forget about simply acquiring other films so it can invest in the collecting of Academy Awards. It will have to develop its own tentpole IP at some point – product that can, instead, invest in the collecting of cash.
Maybe now is the time (finally); what else can we infer from MGM? After all, over $8 billion of capital shouldn’t change hands without some forethought, and that forethought most likely is based on using the multiplex as a value driver as opposed to a digital menu that recommends content based on the last entertainment piece watched.
There are two valuable outcomes to theatrical: it is a revenue-driver all its own for the company, and it will serve as a synergistic advertisement for Prime streaming.
Considering the mandate for reboots and the like, the best way to turn those new versions into bona fide franchises would be silver-screen exhibition. The pandemic, however, has complicated that goal – remember, it wasn’t that long ago when SARS-CoV-2 was a catalyst for streaming.
It still arguably is, especially with continued variation of the virus; Amazon should nevertheless seek out theatrical ROI via MGM. Why?
The latest Spider-Man feature totally surprised me, if I’m to be honest. Sony Group Corporation (SONY) took that one to market and made a killing…the film should top out at roughly $800 million domestic, $1.9 billion worldwide. Considering how one of the company’s other big movies of the year, Ghostbusters: Afterlife, underperformed to some degree because of variants, scoring under $200 million worldwide, and taking into account that it seemed to be well-received by followers of the franchise, I didn’t anticipate the eventual scale of Spider-Man‘s success.
That success, though, proved that the right tentpole at the right time can achieve box-office action now that effective vaccines are in widespread distribution. Since it will take some time after the recent closing of the acquisition for Amazon to exploit its opportunity with MGM and place product on screens, one could further argue that the pandemic will pose less of a risk on theaters because of new treatments and variant-specific vaccine technologies. (Don’t count out negative pandemic effects entirely, however, as that risk can always evolve; it should be noted that for non-tentpole product, it intuitively stands to reason that the risk is higher.)
But the opportunity is there for Amazon/MGM, and it will require new thinking on the part of management. It’s difficult to reorient a tech company’s corporate thinking to something beyond the small screen…it’s understandable, since that’s where the costs and risks can somewhat be controlled; launch a film on a global basis, and the variables change as it is a different ecosystem entirely.
Yet, here’s a way Amazon could perhaps add value to its own theatrical strategy: window length. The online retailer could apply data analysis to see how long windows should be for its IP released to theaters. Day/date tests, 45-day, 30-day, 28-day…all of it could be explored and then analyzed.
New CEO Andy Jassy should be excited about the opportunity surrounding filmmaking and Prime. He could take the whole division well beyond what Jeff Bezos did with it. This might include further acquisitions. I would be very remiss not to mention Lions Gate Entertainment (LGF.A) (LGF.B) at this juncture (I am long LGF on speculation that it will at some point be a takeover target).
Lions Gate has a library, too, and is similar to MGM. They both are small studios that have investments in streaming – Lions Gate with Starz, MGM with Epix (recall, too, that Lions Gate at one point was a partial investor in Epix before the former purchased Starz).
I’ve read commentary that points out an issue with Epix and Prime…now that MGM is in the hands of Amazon, Epix might be a redundancy. Starz would be too, supposedly, if the online retailer took on Lions Gate.
If the company didn’t want to go with the hub strategy and simply embed another streamer within Prime, it could look to both brands as opportunities to grow separate services, or even to keep a hand in linear. Paramount Global (PARA) uses Showtime for its legacy linear strategy and Paramount+ as its tiered streaming product for the over-the-top universe; Amazon could retain a similar structure.
Lions Gate, though, would offer up several franchises (Hunger Games, Saw) and talent relationships (e.g., Seth Rogen through his deal with the studio) and would create wider paths into Hollywood. MGM paired with Lions Gate would bring together cost synergies and cross-pollinate new ideas for content.
Speaking of Paramount Global, others have speculated on Amazon using that company to further its content ambitions. I can see that possibility as well, especially since Amazon also enjoys being a content aggregator. Lions Gate is arguably an easier acquisition to make, based on price and complexity of asset mix, but it is fascinating to contemplate how the retailer would make use of P+ and Showtime along with Prime and the entire MGM library.
No matter what, Amazon will most likely not stop at MGM.
Let’s conduct a thought experiment. Amazon takes its Prime Video streamer to 50 million global subscribers, spread through ad-free/ad-supported tiers. It prices it such that the service is self-supporting without needing cash from the Prime shipping service, even to the tune of billions per year in filmed-entertainment costs.
What this means is Amazon would have essentially paid for all its content needs via a separate entity, and it would still be able to offer the streaming product as a value-add to its shipping subscription service. This is a win-win because Amazon could then focus capital from the shipping product on logistics.
But it’s not just that theoretical, tangible aspect that has me thinking about all this. Consumers love the shipping, but the word seems to be that the entertainment side of the equation, while perceived as a nice side benefit, isn’t necessarily in the same league as Netflix. Amazon should want to change that because when you get to the point of people not being able to decide if they like the shipping or the shows better, then you’ve got a situation where churn for either is likely radically decreased.
That might be a tall order, but it should be the goal. MGM would seem to indicate a new species of seriousness for Amazon vis a vis its relationship to Hollywood.
The interesting thing is that Amazon at one time could have really disrupted Hollywood in the same way that it disrupted retail; going back to that Amazon Studios experiment, I recall how the company had a script called Zombies Vs. Gladiators on its development slate, only to never pursue it after spending some money on it with payments to the writers; always thought that one should have received a green light based on the title and inherent marketability.
Even though buying MGM isn’t exactly a novel action, can the company use the asset to disrupt content production? Maybe not that, per se, but it can use the new asset to disrupt itself – to get itself finally on a path to the multiplex. MGM comes with IP, connections to producers, and a small studio system that, if Amazon plays its cards correctly, can bring the company’s video product and theatrical distribution ambitions finally to a point where it should be this late in the game of the streaming wars.
Via organic growth and growth by acquisition, as Amazon continues to fuel expansion into content and subscription/ad-supported services, shareholder value will follow and will serve as a pillar for the company in conjunction with the retail side and the web-services side. Consider this stock a long-term investment on pullbacks during a volatile marketplace.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AMZN, DIS, LGF.A, LGF.B, NFLX, PARA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Amazon And MGM: Catalyst For Prime, Multiplex Strategies – Seeking Alpha
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