Amazon’s MGM deal doesn’t need to revolutionise streaming to pay off

The world may have spent the past year sprawled in front of the TV but multiplying streaming services mean the sector remains cut-throat.

Disney does not expect Disney+ to become profitable until 2024. Netflix has only just decided it can fund operations without external borrowing. Amazon’s recent deal to buy film studio MGM could prove an expensive trophy. 

It is an odd valedictory move by Amazon founder Jeff Bezos, who steps down as chief executive next month. But the good natured investor reaction to the $8.45bn purchase reflects acceptance that Amazon often makes good on long term plans. Bezos is, after all, the man who funded a multimillion dollar clock designed to keep time for 10,000 years. SoftBank boss Masayoshi Son’s 300-year vision looks short-termist by comparison.

Unless Amazon is planning to open Bezos World in Seattle, it will not be able to monetise streaming subscribers in quite the same way.

The success of Amazon side hustles like cloud computing and advertising inspire confidence. But streaming is a business in which abundant consumer choice means companies face high production costs and the need to be competitive on subscriptions.

Add to that the problem of saturation. Households might be willing to pay for two or three streaming services but only devotees will sign up for five or six. Netflix created the genre and retains brand loyalty. Disney’s family friendly content has encouraged 100m people to sign up in a year and a half. That leaves room for one more. 

Amazon is best placed to take the last spot. It already has 200m Prime subscribers able to watch Amazon Prime Video. The MGM deal offers access to 17,000 episodes of TV and 4,000 films, including joint rights to the James Bond franchise. It is unlikely to make viewers reconsider existing subscriptions but it could prevent them cancelling their Amazon one.

Still, it should not be considered a radical move. Amazon’s entrance into an industry once struck fear into the hearts of rivals. When it bought supermarket chain Whole Foods, shares in Walmart, Kroger and Target instantly fell. Yet Netflix and Disney share prices have remained steady.

It helps that each company has its own rationale for streaming. Disney’s direct to consumer business may be loss making but it has other ways to make franchises pay via cruises, amusement parks and merchandise.

Sophie Lund-Yates, senior equity analyst at Hargreaves Lansdown, calls cross-selling Disney’s ace. “If you’re a Beauty and the Beast fanatic you’ll snap its associated products up in any and every form Disney presents it in,” she says. Unless Amazon is planning to open Bezos World in Seattle, it will not be able to monetise streaming subscribers in quite the same way. 

Instead, the MGM deal looks like another way to build up the Prime subscription base. Prime subscribers pay $119 per year in exchange for perks like free shipping on goods and Prime Video. Boosting numbers is a priority.

This week Amazon announced that Prime Day, a made-up shopping holiday designed to attract new subscribers, would return after being postponed last year. Sign-ups already equal the number of Netflix subscribers. The group, who tend to buy more than the average Amazon customer, is worth more to the company than just the subscription fees they pay. 

Adding more content to Prime Video should sweeten the deal. Amazon’s profits mean that it can afford the purchase. It generated more than $26bn in free cash flow over the past year. Disney, ViacomCBS and T & T have their own streaming services and do not want to share content. Buying MGM adds to Amazon’s back catalogue and could lock in future spin offs.

It is possible that MGM, while expensive, will not transform Amazon or the industry it operates in. There is precedent. MGM is Amazon’s second biggest takeover after supermarket chain Whole Foods, which it bought in 2017 for $13.7bn.

There was an assumption at the time that Amazon had a clever plan up its sleeve to transform the entire grocery industry. If there was, it has yet to manifest. The purchase of MGM may not revolutionise streaming but it could still secure Amazon’s place in the cut-throat industry.