March 20, 2018

What Are Viewers For?

Fascinating news out of Amazon this past week courtesy of our friends at Reuters. Internal documents from the Seattle giant reveal that about 26 million US broadband households consumed Amazon Prime Video in 2017. Even more interesting, however, is the fact that Amazon believes Prime Video helped it acquire roughly five million new Prime subscribers (at $99/year) over the past several years. Amazon even evaluates its originals (such as The Man in the High Castle or The Grand Tour) based on their CAC (customer acquisition cost) numbers.

This is a radically different view of the purpose and role of TV, and it’s amazing to see it laid bare using actual numbers for the first time.

What does this tell us about the future of TV? Two things.

1. TV Can Be a Means, Not Just an End
For most premium video content providers — and for most of the history of the TV industry — the audience was an end unto itself. Think of Nielsen ratings — practically the holy writ of the TV business since the 1950s. The goal was (and is) simple: attract as many viewers as possible to a particular show.

And, yes, this applies to both advertising and fee-based business models. The advertising case may seem a little more obvious. For example, Coca-Cola and McDonalds want to get their ads in front of more people rather than less, and in reality the objectives of Netflix are not terribly different. Netflix wants viewers to watch more frequently because it believes that engaged viewers are happy viewers that don’t churn off the service.

In both cases, consumption of the video is seen as the ultimate behavior. It’s not like Netflix is trying to sell some other product. If I’m watching Netflix, the service has done its job. Period. Full stop. The means (viewers) is an end in itself (can’t view without ‘paying’ for the content, either via adds or fees).

Amazon Prime Video is something totally different. Amazon’s real goal in producing original series is to get people to sign up for the Amazon Prime service. The goal of Prime, in turn, is not to get folks to watch video, but rather to buy stuff on Amazon. In the immortal words of Jeff Bezos himself:

When we win a Golden Globe, it helps us sell more shoes.”

For Amazon video, then, consumption is actually two steps removed from the ultimate objective. Put another way, viewing video is a marketing tool at the top of the funnel. The goal is not to have me watch the show, any more than Amazon’s goal is merely to have me visit the website. In both cases, the purpose and goal is conversion, which is defined as making a purchase (or many purchases) from Amazon.

If one believes, even a little, that goals matter (i.e., what gets measured is what gets managed), then this radical shift in the purpose of video must have some impact on the type of shows that are produced, which brings us to our second point.

2. Shows that Convert Well may not be the Same Thing as Shows that are Enjoyable to Watch
In a conversion model, the key metric is the cost-per-conversion, not cost-per-viewer. For example, Season 1 of The Man in the High Castle had eight million US viewers, but resulted in 1.15 million new Amazon Prime customers worldwide. At a production cost of $72 million, the show cost $9/viewer but $63/new Prime subscriber.

The second number is far more important than the first for a high growth company like Amazon. At $9/viewer/year for a single show, it’s not clear that there is a business case for Amazon to make shows that cost that kind of money. Obtaining a new Prime customer for $63, however, makes a ton of sense.

The lifetime value (LTV) of a Prime household is probably more than 10x that number, when you consider not just the $99/year subscription revenue stream over a couple of years, but also the significantly higher purchase volume of Prime households vs. baseline.

The $64 million question for Amazon (and all of its content producer partners) is what kinds of shows most efficiently convert viewers into Amazon better buyers. The leaked data suggests that The Grand Tour and The Man in the High Castle perform far better than other Amazon shows in this regard. Are these two shows the “best” from a viewer’s perspective? I would say it’s unclear at most.

What’s clearer is that both of these shows lend themselves to very splashy marketing campaigns. I have personally seen looping video clips for The Grand Tour (complete with fast cars and explosions) in the London Underground, and print ads for The Man in the High Castle (complete with swastikas) plastered all over New York subway cars.

Not every TV show lends itself to this kind of marketing. Does a tearjerker show like NBC’s This is Us translate to an ad on the side of a bus, or selling merchandise via Amazon Prime? Not so much. I think these metrics go a long way to explain Amazon’s enthusiasm for The Lord of the Rings. That is a massive global blockbuster brand that will look great on the side of a bus and in the Prime ‘toy isle.’ As long as this results in more conversions to Prime — and more ‘shoe sales’! — Amazon will be happy. The fact someone watched a show is practically irrelevant.

Aside from promotional crossovers, online retailing and TV production have largely occupied separate worlds…until now. In the hands of Amazon, a TV show is just another marketing tool designed to convert leads into Prime members. Will a TV service built on conversion metrics actually produce good TV? Maybe. Perhaps the more disturbing question is whether it even matters.

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 the video ecosystem and technology companies. He lives near Seattle, WA.

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