April 18, 2017

A Loss Leader

As all of you sophisticated TDG readers know by now, Amazon won this year’s beauty contest with the NFL. Jeff Bezos and company paid $50 million for the rights to stream 10 Thursday night games during the 2017-2018 season – five time the amount paid by Twitter for the same package last season.

This is nice for the NFL, but will football rights do any more for Amazon than they did for Twitter? And what does it mean for the future of TV? Two thoughts.

1. Streaming NFL Football Is A Loss Leader, Not A Profit Center.

Loss leader (noun): A product sold at a loss to attract customers.

Retailers in both the online and brick-and-mortar worlds are addicted to loss leaders, employing them in everyday pricing and in concert with special promotions and sales. The local supermarket sells eggs and milk at low or no margin to get shoppers into the store on a regular basis. (That’s also why these products are all the way in the back corner; so the foot traffic generated passes through as much of the store as possible). Department stores provide big discounts on winter coats now that spring is here, hoping that consumers will come in for the bargain and walk out with a new pair of shoes for spring. Amazon and other online retailers offer daily deals knowing that once online shoppers put one item in their cart they are more likely to check out with others.

The entire Black Friday retail phenomenon has been built around the mass promotion of loss leaders. Everyone knows that Best Buy and Amazon lose money when they sell a big-screen TV or a new laptop computer for $99. Happily for them, however, the hype around these events brings shoppers into the stores that, once again, are well disposed to buy additional items. Whether it’s supermarkets or big-box CE retailers, loss leaders are a necessary strategic tool.

The NFL online package fits this theory like a wide receiver’s glove. Given the basic rules of the game, there is virtually no way for a streaming provider to make money off of NFL games. To wit:

  1. Traditional broadcasters NBC and CBS already provide ‘free’ access to Thursday NFL games and own viewership;
  2. NBC will also stream some Thursday night games for free (online buys are for 10 games rather than 17);
  3. Amazon’s online NFL feed will feature the legacy broadcaster’s brands and cross-promotions;
  4. Amazon can’t charge viewers to watch a game (no pay-per-view); and
  5. Advertising is constrained within narrow bounds set by the NFL.

The bottom line: On its best night of last year’s season Twitter may have broke even (treating each game as a $1 million venture), most certainly didn’t make a lot of money on the deal in general, as reflected by its flat user growth, flagging stock price, and unwillingness to retain the rights this coming year. The traditional loss-leader model failed to work for Twitter, and for reasons next discussed.

2. Amazon Is Capable Of Implementing A Loss-Leader Strategy. Twitter Was Not.
A loss-leader strategy assumes that a business has something else (profitable) to sell. Supermarkets can sell milk cheap only if shoppers grab a bottle of wine on their way to the checkout line. This was (and is) a major problem for Twitter, as social networking outside of LinkedIn and dating sites is not a freemium business. Twitter buying NFL rights is like a public park paying money to give away free lemonade. They may attract a few additional users, but then what? There is no way to monetize the extra traffic. The person just enjoys ‘free lemonade’ and goes back to whatever they were doing before.

I watched a couple NFL games on Twitter last season. Unfortunately, my attention was unmonetized. I was a casual Twitter user before I watched the games and remain so. My Twitter behavior did not change my usage of Twitter one iota and, based on the numbers, nor did anyone else’s. Other than the $10 million expense, it is not clear to me that Twitter has anything to show for the whole experience.

Conversely, Amazon has a much better hand to play. First, it already offers a membership-based shopping service (Amazon Prime), to which viewers must sign onto in order to watch the NFL games. That’s called customer acquisition, and there is real value in that. I wouldn’t expect a flood of new customers to sign up simply because of a couple of NFL games, but a few certainly might.

Second, within the Prime membership, Amazon offers a first-class subscription video streaming service. If the NFL relationship raises awareness of this offering, that’s great for Amazon. Notably, this benefit occurs whether or not anyone actually watches a game. All Amazon needs to do to benefit from this relationship is plaster the NFL logo and a picture of Tom Brady’s face on the side of a bus next to the Amazon Prime Video logo. Many consumers will see the ad and realize a couple of things. First, that Amazon actually has a video service. This is no small thing, and not necessarily easy or cheap for Amazon to achieve otherwise. Second, an Amazon/NFL combination is unusual enough to get your attention. Most people realize that the NFL is not ‘everywhere’ online, and most realize (for example) that you can’t watch NFL games on Netflix. In short, the NFL relationship instantly makes Amazon’s video offering both more visible and more differentiated vis-à-vis other SVOD services. At Amazon’s scale, that level of marketing benefit could easily be worth $50 million all by itself.

Finally, Amazon may have the ability to experiment with personalized advertising around the video window in ways that could be interesting. Unlike Twitter, Amazon knows who I am, where I live, my Amazon shopping history, as well as items I’ve looked at recently on the Amazon site. (This permits a level of targeting from which the NFL would definitely benefit.) Amazon has no interest in running pre-roll video advertisements. That’s not how ecommerce stores work. This is probably a good thing from the NFL’s perspective, because there is less conflict with their traditional advertisers. Instead, Amazon is likely content to just frame the video once in a while and then retarget me within that frame. Again, this could be great for football because games are long and people’s attention wanders. What’s wrong with doing a little shopping midway through the third quarter while the opposing team runs it up the gut for two yards on second down?

Terms like ‘premium content’ have become next to useless. The NFL is expensive, but it’s not ‘premium’ from the perspective of the company streaming it. It’s actually just an expensive loss leader. If Amazon can accept this and work with it, its new relationship with the NFL might just work.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to technology start ups. He lives near Seattle, WA.

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