Content is King to quote Sumner Redstone. At CEORater we spend a fair amount of time thinking about content. Over the past 24 months we have considered the following for our platform: 1.) video streaming of earnings calls with associated analytics 2.) employee video reviews 3.) business news (original and third-party) and premium blogs, including this one (we hope to expand this roster across Technology and the Capital Markets).
The Media Landscape’s Tectonic Shifts
In recent years the media landscape has changed dramatically as traditional models (cable bundles, DVD rentals) have given way to new delivery models such as over-the-top (“OTT”)/ streaming and new original content producers such as Netflix, Amazon, Apple and Google.
More recently the OTT game has shifted toward original content production as media companies move to create proprietary OTT platforms. HBO rolled out its proprietary streaming service several years ago, Disney plans to do the same in 2019. This has forced third-party content aggregators such as Netflix to shift their business models to focus on original content production.
I say all this as a former sell-sider who is critical of the current model for valuing media companies. Yes, the number of subscribers matters as do the number of net new subscribers in the quarter, average subscription price etc. However, sufficient attention is not paid to the amount of content available on a given platform – particularly original content.
Introducing “Content Yield”
When Disney rolls out its OTT offering in 2019 – how many hours of original content will be available for streaming? Will this metric be disclosed quarterly? Same question goes for Netflix and other OTT services such as WWE.
The number of subscribers is a lagging indicator. Content is king. Content drives subscriptions. One would think there is a correlation between content hours and subscriptions – i.e. “content yield”.
For every X hours of programming we have Y subscribers;
For every X hours of original programming we have Y subscribers;
For X hours of programming added to the platform we have Y net new subscribers;
For X hours of original programming added to the platform we have Y net new subscribers and so on.
It would be interesting to test Content Yield across the media landscape.
Amazon’sCore Services Portfolio drives the company’s macro strategy. AMZN’s more recent product and service offerings (both organic and acquired offerings) are covered in the “2nd Ring” and “3rd Ring” sections and serve to strengthen the Core portfolio.
Amazon.com: Amazon’s crown jewel. The world’s broadest and deepest ecommerce platform.
Amazon Web Services (AWS): The dominant cloud services platform. 2017 revenue of $17.5 billion, a 43% Y-O-Y increase. AWS is a sleeping CyberSecurity giant. The AMZN business unit had 62% market share as of Q4’17 and likely has a similar if not greater share of the technology startup community as customers. Thus, if tomorrow’s tech giants are built on top of AWS, it stands to reason that AWS ought to be well positioned to lead the CyberSecurity effort in instances where it owns the customer relationship. If one company is to become the dominant CyberSecurity vendor over the next decade we expect it to be AWS. Amazon’s more recent initiatives (Amazon Key, Amazon Ring, its AI effort, original video content production and music to name a few) all feed the cloud, creating new hooks into it while enhancing its utility and value.
Amazon Prime: a multi-billion dollar recurring revenue stream that provides long-term visibility and helps the company place long-term multi-decade strategic bets.Consumers were originally lured to prime via shipping discounts. Amazon has since extended those benefits to include various forms of digital content, its August 2017 Whole Foods acquisition and may be offered as an incentive to any Amazon service. Prime’s year-over-year subscriber growth and modest price increases helped contribute to Amazon’s subscription services revenue of $9.7 billion – 52% growth over 2016 revenue of $6.4 Billion. The takeaway here is that as AMZN’s recurring revenue base continues to scale and become a greater percentage of the revenue pie, it enables Amazon to outflank competitors across various industries. For this reason we would expect Amazon to win the day in the original content business when the dust settles. Not Netflix or Disney (too small in both cases), not YouTube/Google (not sure of where they want to play in terms of original content), not Apple (too slow, thanks in part to a CEO who made his chops in the supply chain, not as an entrepreneur) and not Facebook (too green in the Enterprise arena).
Amazon Alexa (AI): Google and Amazon lead the global machine-learning (“ML”)/ Artificial Intelligence (“AI”) effort in that order. Apple’s Siri is a clear laggard from a speed and accuracy standpoint (what matters). Alexa-powered Echo devices are market leaders. This is important as the more Echo devices, presumably the more Alexa-based queries. The greater the number of voice queries, the smarter Alexa becomes. We believe that Amazon’s integrated retail portfolio will help the company solidify a smart-speaker leadership position. By integrated we are referring to the fact that an entire transaction may occur on Amazon’s supply chain beginning with Alexa-powered devices to the Amazon goods and services available for sale to the Amazon warehouse where they are stored to potentially the Amazon truck (autonomous?) or drone that will deliver orders. Google on the other hand has a similar front-end experience but begins to differ on the purchase side. Google doesn’t have its own global warehouse/ inventory management/distribution system and instead partners with Wal-Mart and other retailers in what is known as Google Express. Amazon has essentially become the defacto product search engine, taking share from Google in search. The ancillary effect is that this search traffic makes Amazon’s search algorithms and Alexa smarter.
Amazon’s 2nd Ring
Amazon’s 2nd Ring consists of products and services that strengthen Amazon’s core product and services portfolio. This is largely achieved by removing friction from both ecommerce and brick-and-mortar transactions. Further, 2nd Ring products and services create “hooks” that enhance customer loyalty and drive additional purchases.
Amazon Echo: We touched on Echo in the 1st Ring section. The important item to note is that the more products and services that Amazon attaches to Alexa, the greater the probability that Alexa’s usage will increase. The more Alexa is used, the smarter it becomes. This is important as we expect for AI to be as commonplace as electricity in the not too distant future. At present Google is the undisputed ML and AI leader as a result of it being the dominant search provider. However, cracks have appeared in Google’s armour. Amazon has become the default “product” search destination and social media platforms such as Facebook, Instagram, Quora and Twitter have carved out their own search niches around friend reviews, photo search, expert opinions and news. Further, Alexa-based queries are stored in Amazon’s cloud which helps Amazon become smarter about you and your family’s behaviour and shopping preferences – predicting demand before you hit the re-order button or voice command. What will it be sir, Minority Report or 1984?
Amazon Go: Amazon Go is another add-on service that removes friction from the retail experience. The intellectual property deployed in Amazon Go stores allows for a cashierless retail experience as “purchased” items are accounted for the moment customers remove them from shelves. We do not expect for Amazon to license this technology but rather to keep in-house as a sustainable competitive advantage. Over time we expect for this technology to be rolled out widely across Whole Foods and any other “brick and mortar” retail operations that Amazon may acquire.
Amazon Key & Ring: launched in October 2017 for Prime members, AMZN Key is a service that allows couriers and other individuals whom you permission (friends and family members for example) to unlock your door and access the home. Amazon cameras record visitors while they are in the home (more intelligent data for the cloud). Amazon’s acquisition of Ring last week is another piece to the home delivery/ home security ecosystem. Key and Ring help close the retail circuit by extending AMZN’s footprint into the last mile of the retail transaction – home delivery.
Amazon Video: Amazon is investing both in original content production, live sports (NFL, UFC) and offering “channels” in conjunction with networks such as HBO. Prime members enjoy exclusive content for “free”. The company is expected to invest approximately $5 billion during 2018 in video content. We believe that in the end whomever owns Disney and its content libraries will be the clear global content leader. We advocate a position where Amazon, Apple, Facebook, Google and Microsoft all make a run at Disney. Apple has the edge in our view given that Disney CEO Bob Iger has a history with Apple that dates back to his friendship with the late great Steve Jobs.
Whole Foods (acquired)/AmazonFresh:Amazon recently announced that it is merging its PrimeNow and AmazonFresh services. The Whole Foods acquisition will provide Amazon with a treasure trove of offline customer point-of-sale data. Further, expect Amazon to leverage Whole Foods to attract more Prime subscribers while putting the hurt to the grocery food store industry. From an operational standpoint Amazon is already leveraging some of the inventory management expertise it has developed over the years in its warehouse operations.
Amazon’s 3rd Ring
The opportunity here is for AMZN to deliver goods and services to the home/consumer with increasing efficiency. “Efficiency” means at lower cost (drones/ Amazon Prime Air and self-service via Amazon Lockers) while increasing the number of customer touch points (Amazon Key couriers may leave Ads/coupons etc.). In terms of what may come – an Amazon rideshare service could make sense given Amazon’s entrenched customer relationships, built-in trust factor and focus on delivery. When autonomous vehicles are not deployed on deliveries they may be deployed in the field moving passengers from point A to B. Until then, Amazon will continue to swallow industries – until its inevitable break-up.
Yes if You Ask Us While AT&T moving to acquire Time Warner and Disney (and Comcast?) moving to acquire Fox are interesting deals, it’s more interesting to us what the next chess move may be in a world that increasingly values content (live sports and premium original content in particular). We recently wrote about and…
No, we’re not referring to bit player Hulu – which Disney will own 60% of post Fox deal close. Rather, the media/technology landscape is not static. Apple plans to invest $1 billion in original content (TV and film). Amazon is a content juggernaut and will have invested approximately $5 billion in video content during calendar year 2017 (Netflix approximately $6 billion over the same period, $8 billion in 2018). Facebook announced a deal with the NFL in September 2017 to stream game highlights and is reportedly looking to hire executives to secure the rights to additional live sports-related content. Could TV and film be far behind for Facebook? You may have noticed that Google is pushing its YouTube subscription service if you’ve watched a YouTube video lately. However, we haven’t heard rumblings of YouTube looking to become aggressive in acquiring third-party content or investing in original content. Video content libraries are grist for the mill for these content giants. Every independent video content provider and content library (i.e. movie & TV studios) is “in-play.”
A combined Disney/Fox OTT service and Netflix are the clear OTT content leaders. However, when the dust settles we suspect that both Disney/Fox and Netflix will be acquired by some combination of Apple, Amazon and Facebook. Apple and Disney have a relationship and therefore we would favor Apple as the likely Disney acquirer. It is unclear if Apple would initiate takeover talks with Disney or if Tim Cook is a counter-puncher and would wait for another company to move first on Disney before making an approach. Our view is that Apple, Amazon or Facebook could potentially move on Disney as soon as the Fox deal closes or nears close. Disney negotiations with Apple or any potential suitor would likely put Netflix in play. This time around it may be more difficult for Reed Hastings to resist.