Amazon Is Building One Platform To Rule Them All

Amazon’s recent $250 million purchase to acquire the TV rights to The Lord of the Rings franchise sent shockwaves throughout the entertainment industry. While the price tag raised eyebrows, there are many historical precedents of conglomerates making major Hollywood investments.

For Amazon, however, flexing its conglomerate muscles by outbidding others for the LOTR rights is not just about trying to raise Amazon Studios’ profile with a big hit with enormous cultural weight in order to make Amazon Video the go-to streaming platform. It’s also about deepening customer loyalty to Amazon Prime by creating a stickier subscription service.

Conglomerates & Content

Conglomerates have always had their hands in entertainment

Content has been funded by conglomerates since time immemorial. In 1989, Sony purchased Columbia Pictures for $3.4 billion as part of its strategy to “build a total entertainment business.” (It’s no coincidence that Columbia’s largest shareholder prior to the Sony acquisition was another conglomerate – Coca-Cola.)

French conglomerate Viviendi purchased Seagram, the owner of Universal, for $41 billion in 2000 as part of an acquisitions splurge. Indian conglom Reliance Industries took on a sizable investment of $325 million in Steven Spielberg’s DreamWorks in 2009. Wang Jianlin, China’s wealthiest person, made a splash in 2015 when his property and media group Dalian Wanda bought Legendary Entertainment for $3.5 billion.

Sony wrote off more than $3 billion in losses from its Columbia acquisition. Vivendi paid an 18x cashflow multiple – considered pricey – and had to write down a significant portion of its acquisitions, of which Seagram was the centerpiece. Reliance’s foray also turned out to be more costly than clever. In the aftermath of Reliance’s gambit, one industry mogul wryly observed that “Hollywood has a long, distinguished record of eating up foreigners and then spitting them out.” The lesson might apply just as well to foreigners from Seattle as from Mumbai.

Amazon: In Search of a Hollywood Hit

Amazon’s biggest hit pales in comparison to Netflix and HBO’s hit shows

Amazon’s track record to date in Hollywood isn’t too dissimilar from other congloms’ experiences. It started Amazon Studios in 2010 and started offering Prime members access to free videos and TV shows to complement free shipping in 2011. Over the years, its studio division has ramped up original content to feed more movies and shows into Amazon Video and to help convince members to renew their Prime subscription.

The Man in the High Castle is the closest Amazon Studios has gotten to a crossover hit conjured out of fantastical world-building—the sort HBO has nailed with Game of Thrones and Netflix has achieved with Stranger Things. Despite its popularity with viewers and favorable reviews from critics, High Castle hasn’t bewitched audiences like Things or even provoked discussion like Hulu’s The Handmaid’s Tale. (Another blow to Amazon (and Netflix): Tale enabled Hulu to nab the first Emmy for Best Drama among the streaming platforms, despite investing in original content later.) High Castle certainly hasn’t executed a hostile takeover of pop culture, complete with ice-zombie armies and dragonfire, in the same way that Thrones has done for two months every year for the past few years.

Backing up these opinions with data is easier said than done as tracking streaming audiences is notoriously difficult, and streaming platforms are notoriously coy about releasing these figures. But independent data analysis indicates Amazon’s “breakout” show is just 20 to 30 percent as popular as GoT and Stranger Things. Dragons and Demagorgons crush Nazis every time, apparently.

(It’s worth noting Amazon has fared better in its movie business. It distributed Manchester by the Sea, which exceeded expectations at the box office, was nominated for Best Picture, and won Oscars for Best Actor (Casey Affleck) and Best Original Screenplay (Kenneth Lonergan). The Big Sick was another surprise box office success and is generating Oscar buzz this year.)

Return of King Bezos

Bezos is delighted now that he has LOTR in his possession

With billions of dollars spent and no “watercooler” show to speak of, Jeff Bezos mandated a programming shift at Amazon Studios this year to focus on high-end drama series with global appeal. In September Forbes opined on the move: “It’s going to take some very, very key acquisition deals to turn a book or comic into a Thrones-level hit for Amazon...how about an Amazon series set in Middle-Earth? Go big or go home.” After throwing down $250 million for just the rights to The Lord of the Rings, it’s clear: Bezos doesn’t go home.

All in, Amazon could be on the hook for $400 million to bring LOTR to a TV screen near you. Deadline estimates the production budget for this kind of fantasy series at around $100-150 million—an eye-popping but reasonable number, given Thrones has batted at the $10 million-per-episode mark for the past few years and is rumored to soar to $15 million for its final season.

Amazon has shelled out funny money in the recent past: It paid $160 million for two seasons of a new David O. Russell series (and later ate $40 million to axe it). It also locked up a $70 million deal with Mad Men showrunner Matt Weiner for just eight episodes of his follow-up series, The Romanoffs. These look like rounding errors in light of the potential $400 million commitment Amazon is making for this series. Bezos is playing the role of Gandalf, possessing the foresight and wisdom to understand the valuable role LOTR can play in Amazon’s ecosystem. I wonder how much a palantir costs on Amazon today?

Turning Around A Struggling Streaming Platform

Amazon and hang – not a thing...yet

Amazon Video still has a long way to go before consumers while away their hours there in the same way as they camp out on Reed Hastings’ platform. I’ve yet to hear of anyone asking to “Amazon and hang.” A franchise supernova like LOTR might go some way to remaking that landscape and making consumers “love” Amazon Video.

That being said, we don’t yet know what talent this show can attract in front of and behind the camera. Additionally, with Netflix committing up to $8 billion for original video content in 2018 and Apple entering the arena with $1 billion in tow, Amazon’s LOTR bet is no sure thing to be a runaway hit against increasingly fierce competition.

Feeding the Prime Flywheel

Amazon Prime has a grip on you like Sauron had a grip on the world of dwarves, men, and elves

We can surmise a lot about how Bezos views the LOTR investment from his tweet announcing the deal: “Amazon Prime heads to Middle Earth.” Notice how he explicitly ties LOTR with Prime over, say, Amazon Studios, or just Amazon more broadly.

Latest estimates peg Prime at as many as 80 million subscribers - nearly two in three households in the U.S. But only 14 percent of Prime members subscribe specifically for video benefits. While Prime continues to attract and retain subscribers by reducing shipping times to as little as one hour and rolling out Prime-exclusive offers at Whole Foods, Bezos clearly believes its entertainment offerings aren’t adding equivalent value.

Excluding the 20 percent of Prime members who claim to never use it for video and factoring in eMarketer’s assumption of roughly 2.5 viewers for every paid membership, Prime’s potential audience could be as high as 160 million viewers. But as I covered, Amazon is losing these millions of eyeballs to Netflix. Netflix homes spend over one day on the platform monthly, compared to just under 11 hours for Amazon homes.

Bezos has said the reason he values Amazon’s video strategy so highly is that “[hit shows] are great for customers, and they feed the Prime flywheel – Prime members who watch Prime Video are more likely to convert from a free trial to a paid membership, and more likely to renew their annual subscriptions.” Unlike a Netflix subscription, Prime doesn’t just offer access to free video content; it’s the gateway to the “Everything Store” and now, conveniently, Whole Foods stores, where many Prime customers likely already shop. Bezos has said, “When we win a Golden Globe, it helps us sell more shoes.”

Prime members are “Young, Well-Off and Shopping a Lot” – exactly the type of person that is so important to retain. Amazon also knows these are the types of people who might be enticed by a blockbuster LOTR show, and it’s happy to give them another reason – regardless of the cost to the company – to feel like they “have to have” Prime.

Amazon isn’t breaking new ground by funding movies and TV shows. That expenditure has essentially become a rite of passage for conglomerates. What’s different is that this is the first time the movie viewer is also a customer of almost all the conglomerate's other businesses. That’s reason to believe Amazon’s Hollywood play will fare much better than others have historically. Over the next decade, it wouldn’t be surprising to see Amazon happily sink billions into its Studios business, as long as it fulfills its purpose – to make viewers stay Prime-loyal.

Sunny Dhillon is a founding partner at Signia Ventures, a $100m seed and series A venture capital firm based in the San Francisco Bay Area. He invests in consumer and enterprise startups. He previously worked as the first business development employee at a venture backed spin-off of New Line Cinema, directly for the Lord of the Rings trilogy producers (hat tip to Mark Ordesky), as well as in corporate strategy for Warner Bros., before launching his own startup and becoming an investor.