Amazon has apparently set its sights on a large-scale international expansion that will likely result in a significant inflation of its original content budget.
Jefferies analyst Brian Fitzgerald estimated that Amazon’s video content budget for 2016 was between $4 billion and $5 billion, but that the cost of international expansion to nearly 200 countries could drive that total up another $1 billion to $2 billion in 2017.
“That would bring AMZN's annual content expenditure in line with Netflix, which disclosed ~$6B content budget on P&L basis for 2017. AMZN management highlighted on the last earnings call that content was among the top three categories in which the company was, and planned to continue, investing. On the call, CFO Oslavsky said that ‘video content and marketing associated with that’ was nearly doubling Y/Y in 2H16,” Fitzgerald said in a research note.
Fitzgerald said that Amazon likely already has secured the global rights for its core streaming video offering, but noted that Amazon would likely go after local content in many international markets to expand faster, which would require further investment.
Using “rough estimates,” Fitzgerald said that Amazon dropping an extra $1 billion on content in 2017 would negatively impact its EBITDA margin, net income margin and earnings per share, which could drop by as much as $1.27.
“These estimates, however, do not include any contribution to revenue from potentially monetizing Amazon Video as a stand-alone service or from incremental Prime memberships,” said Fitzgerald. “Incorporating that into our estimates softens the negative impact on margins, slightly in 2017 and more pronounced in subsequent years.”
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The estimated $7 billion figure for Amazon’s content budget is significant because it would outpace the $6 billion that Netflix has said it will spend on content in 2017. Amazon’s big budget, coupled with its imminent move into many of the international markets where Netflix is currently one of the only U.S. SVODs working, presents a big potential risk for Netflix’s growth overseas.
In markets like India, Jefferies analyst John Janedis sees an opportunity for Amazon to compete aggressively with Netflix on price.
“We have noted that NFLX's price point in many non-U.S. markets may be aggressive given the price point of some local offerings, customs to not pay or pay only a modest amount for content, and the cheap cost of the bundle. AMZN's price point appears to be well below NFLX ($15 vs. $90+/yr. in India), and includes a subscription to Prime,” Janedis wrote in a research note.
Of course, Amazon Prime is not currently available in many of the markets where Amazon’s video streaming service is going to launch, meaning Amazon won’t have that perk to lean on in terms of comparison shopping with Netflix. But Janedis believes that Amazon will likely ramp up its investment in local content in international markets.
That strategy could help offset the lack of Prime, at least in the interim. And, as Janedis added, it could put added pressure on Netflix to keep up.
“We have already expected the need for NFLX to move more aggressively into locally curated content and today's announcement reaffirms our view. This could also impact our marketing cost assumptions for NFLX going forward,” Janedis wrote.