After years of kneeling at the altar of long-term thought and bold experimentation, Amazon (AMZN -1.40%) In the end, religion seems to fall down.
The company is cutting costs like never before, axing previously promising new businesses like Amazon Care and announcing its first major round of layoffs, laying off 10,000 corporate employees. A significant portion of those layoffs will come from the company’s Alexa and Devices division, where the company loses $10 billion a year on voice-activated technology, according to Business Insider.
The revelation that Alexa has become a financial quagmire begs the question of what else Amazon is wasting money on. Its international business appears to be one target for savings. The division, which consists mostly of e-commerce operations outside North America, loses money in most years, posting an operating loss of $5.5 billion in the first three quarters of this year.
Another segment that seems to warrant more caution is Prime Video, which Amazon doesn’t directly account for in its financial statements. Aside from a la carte spending on streaming rentals and sales, Amazon doesn’t make money directly from Prime Video, instead using it as a perk to attract Prime members.
The company spent $13 billion on video and music content in 2021, and video spending, including games, is estimated to increase to $15 billion in 2022. More than all of its peers, including even that Netflix (NFLX 3.14%)It was expected to spend $13.6 billion on an amortized basis this year.
Since video is only loosely connected to online shopping, investors have to ask if that $15 billion is money well spent.
Unlike peers like Netflix Disney (DIS 0.90%), Amazon keeps its subscriber metrics close to the vest. Last April’s shareholder letter said the company now has 200 million Prime members globally.
Amazon charges different prices for Prime around the world, but if you assume each of those members paid $139 a year, that comes to $27.8 billion in annual membership fees. That’s close to the $34.1 billion it brought in with subscription fees over the past four quarters, coming from Prime and other subscription businesses like Kindle Unlimited, Audible, and Amazon Music.
Based on those numbers, $30 billion in Prime revenue seems like a reasonable estimate. That means Amazon spends half of its Prime membership revenue on Prime Video, leaving only $15 billion to allocate to other Prime benefits, such as two-day shipping and free returns, which are the biggest drivers of membership. Amazon spent $82.4 billion on shipping costs last year, with at least some of that allocated to Prime.
Of course, the argument for spending on Prime Video is that it encourages new Prime members to sign up and existing ones to shop more online on Amazon. Explaining the company’s different approach to Hollywood, founder Jeff Bezos once said: “When we win a Golden Globe, it helps us sell more shoes.”
That line of thinking also explains why the company spends $1 billion annually Thursday Night FootballIt is said to have resulted in a record number of Prime sign-ups in a three-hour period.
However, at this point there are diminishing marginal returns to spending on Prime Video. Anyone who regularly shops online has come across Prime, which has been around since 2005. The relationship between video streaming and online shopping is also tangential. If Amazon has $15 billion to spend on improving Prime benefits, wouldn’t it be better spent on faster delivery, better customer service or lower prices?
There is nothing magical about the relationship between Prime Video and online shopping.
Amazon is increasing video spending at a time when nearly all of its competitors are tightening their belts. Netflix has had two rounds of layoffs. Disney said it is prioritizing streaming profitability over subscriber growth, layoffs are a possibility, and Warner Bros. Discovery (WBD 3.07%) Layoffs have been announced.
The competitive dynamics of streaming, in other words, are undergoing a correction. Many companies have entered the field, and they are not charging subscribers enough to cover the cost of the content.
Netflix co-CEO Reed Hastings put it best in his company’s recent shareholder letter: “Our best estimate is that all of these competitors are losing money on streaming, and the total annual direct operating losses this year alone could be higher. .$10 billion, compared to our annual operating profit of +$5-$6 billion.”
Amazon is clearly one of the money-losing competitors no matter how you account for $15 billion in content spending. Throwing even more money at video at a time when the rest of the streaming industry is realizing the economics aren’t so favorable seems like a losing battle.
Amazon, like its streaming peers, needs to be held accountable here. Now that Alexa’s massive losses have been revealed, investors should demand more transparency about how the company spends money, including justifying its $15 billion video budget.
The good news here is that there is considerable room for improvement. Amazon has a number of high-margin profit machines, including Amazon Web Services, advertising, and its third-party marketplaces, and the company could be much more profitable than it is today.
For Amazon, being conservative with Prime Video spending only makes sense given what’s going on in the industry, and filling the basement at a time when shares have been cut in half will surely earn a round of praise from investors.
As the company realizes that its money-losing businesses have limits, Prime Video deserves a thorough examination.