Back in November 2022, Amazon (NASDAQ:AMZN) made headlines for what appeared to be a change in its studio approach.
The business plans to produce potentially more than a dozen movies each year specifically for the multiplex as the initial window.
My main concern is with Amazon itself. This will undoubtedly help the company build a thriving entertainment ecosystem that will drive cross-promotional synergies with its e-commerce, advertising, and merchandising initiatives. While that item indicated that theater stocks rose at the time of a report discussing the strategy, my main concern is with Amazon itself.
Additionally, there may be a chance to grow Prime Video subscriptions only for that service’s own sake rather than the associated shipping product. It is a crucial point because if both services are valued equally and highly, the Prime strategy will be very effective; at the moment, it appears that consumers are probably more enamored by the shipping discounts than by the benefits related to the filmed entertainment.
In the future, Amazon’s entertainment assets, led by Amazon Studios, may surpass its online services division in prominence. A clear mandate to provide finished film films to theaters will pay off in the long run, even though there have been stumbles in this division’s progress, most notably a need for a defined vision for the segment. In this article, I’ll quickly cover theories on how that might occur and some of the pitfalls Amazon must avoid.
At current prices, Amazon stock is a long-term buy. Still, as I have previously stated for other well-known companies, no one can accurately forecast how volatile the market will become, so an investor must be prepared to average over time (especially in the next twelve months). I’m still adding to my position right now.
Theater Projects And Their Value
Hollywood operates under a relatively straightforward rule: cinemas are benchmark venues, and movies are touchstone products. Another criterion I’ve been keeping track of lately has been reiterated by the industry website Deadline. Regardless of the low box office receipts, a film that opens in a theater will have an intangible worth that significantly raises the net present value of subsequent ancillary exploitation.
Naturally, I’m paraphrasing, but the main idea is always going to the theaters rather than streaming.
Although exclusives to streaming can improve a platform’s identity, I’m not sure I always agree with that. I prefer to see collapsing windows that activate depending on when the box office grosses weekly plateau, even though theater operators may want windows that extend at least three months or longer with tentpoles.
But I understand. It’s time for a real multiplex strategy with Amazon to take Prime to the next level of success. The number of subscribers receiving the shipping product and having access to video is estimated to be over 200 million. What I want to know is: how many people would be ready to subscribe to Prime Video merely as a streaming service and without a full-fledged shipping/handling promotion, even though Amazon probably knows the answer to this question (but needs to be disclosing it). The latter is the main draw.
Amazon, however, has a chance to improve its Hollywood situation and compete with Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) on their terms with features whose initial window is a premium auditorium screen. Especially Netflix, as it has yet to really embrace the multiplex (it will get there, though; it took a while for advertising, but the company eventually came around to that, keep in mind).
The key is for Amazon to prioritize making money on theatrical releases over capital initiatives, projects whose expenditures are spread out throughout the company’s digital platforms. Naturally, most films need to be amortized, particularly blockbusters that could have significant profit participants attached (James Cameron and Tom Cruise aren’t cheap). But this ought to at least be the aim, as it can create the right corporate mindset: to be more than just a streaming service that manages risk according to a spreadsheet; instead, to make bets and take risks on a diverse slate that includes exposure to top talent, compelling ideas, and budgets of all sizes, all at various percentages depending on the optimization required.
Above everything else, always approach initiatives with a business mindset. Take chances and try new things by all means, but stay within a reasonable distance of a commonplace cinematic aesthetic. In other words, constantly aim for hits.
The latter may seem apparent, but Amazon’s filmed-entertainment content division has, up to now, adopted a “try everything” strategy (well, its nickname is the everything store, I suppose). Additionally, it has made rewards a significant element of its model.
The moment has come to put shareholder profit ahead of Academy Awards. CEO Andy Jassy can use the vast amounts of data the company has to guide moviemaking initiatives and assist in lowering marketing expenses (we always hear that data can achieve this… As a watcher of this sector, I keep expecting to read that a $200 million tentpole film needs only $50 million to advertise instead of $150 million and above). Amazon, come on and prove it; show that you’re a digital innovator. Therefore, it’s time to try a targeted strategy based on IP and franchise building, taking a cue from Disney and its enduring CEO, Bob Iger. Although it is feasible to develop new intellectual property, it is easier to use the Metro-Goldwyn-Mayer library. Jassy, however, will undoubtedly want to search for new purchase prospects, especially if they have appealing assets that may be turned into sequels. Smaller comic book publishers might offer a more affordable option for such a project (recall, e.g., that Netflix acquired Millarworld).
Let’s look at Disney’s studio sector from the 2019 annual report, to give some statistics to this perspective so we may think about it before the second SARS outbreak started spreading worldwide. About $8 billion was the top line in 2017, $10 billion the following year, and eventually $11 billion in 2019. During the same three years, segment earnings increased from $2 billion to $3 billion and then decreased to $2.7 billion, showing some degree of stagnation. The purpose of this experiment is to demonstrate how a blockbuster strategy may provide constant surpluses. However, profit tends to fluctuate in the entertainment industry (and in Disney’s case, the merger with the Fox asset somewhat influenced that pattern). A thriving studio division can result in higher merchandise and streaming sales, including free and paid content. Amazon is betting on advertising as a future growth engine. While most of the discussion focuses on digital and online, I suspect we will see ads attached to content also heavily considered in the mix.
Those extra funds might be used to enhance existing Prime content efforts. Amazon also has an advantage over Disney in a covert sense: while the business, as I’ve suggested here, should want to copy the Disney content-franchise model, since it is starting with a new theatrical strategy and is very different from Disney, it needn’t copy every aspect and can test out new, creative methods to keep costs down.
Budgetary costs are Hollywood’s worst trap. Amazon would be wise to carefully assess how it intends to pay its star talent or whether it should rely more heavily on casting science to find lesser-known talent who would not demand extravagant packages now that Wall Street is growing restless with platform red ink. It’s a problem, but Disney is committed to primarily using star talent to produce ROI. Unfortunately, blockbuster business models don’t work with simple spectacles of high narrative. Large investors may always consider the aura of Amazon’s web services before selling. Still, they will only be impressed by rising content expenses and will go out of their way to give filmed entertainment a multiple in a sum-of-the-parts analysis. There is a clear opportunity here, whether it is recasting roles or hiring less expensive performers.
Since the streaming era has reached a turning point on Wall Street, Amazon also wants to avoid falling into the trap of excessive exclusivity. Therefore, it should move theatrical films to Prime, perhaps with a generous window, but then sell them in physical formats and make them available to rent or buy digitally on Amazon itself (and then on additional competing platforms).
The fact that Amazon is allegedly thinking of investing what some analysts have called a shockingly tiny sum of money to start the theatrical engine—roughly $1 billion—is perhaps most noteworthy. Although this amount may seem insufficient for a company like Amazon, there may be a good reason to proceed cautiously. As this article mentions, the retailer’s cash flow has been problematic, and free cash after other obligations (less equipment finance leases, etc.) is consistently negative. Additionally, the company will want to exercise caution as it attempts to achieve a high valuation for its film business gradually. As I previously indicated, investors anticipate stronger returns from ecosystems with associated streaming units (which describes all your media conglomerates, of course).
Furthermore, $1 billion can still purchase a successful initial slate of potential IP incubators. The key is to provide as much content as possible for every billion dollars spent.
The focus should be on major tentpoles and lower-budget horror movies, but if the firm caps the cost at that amount (for now), a mix of budgets and genres will be used to produce a diversified slate that’s typically the best approach overall. Consider two or three tentpoles (perhaps $250 million to $300 million) and one or two cartoons for every billion (remember that kid-made projects often result in product sales). If the business could reduce the project expenditures, I could go for $1 billion total, including marketing and production costs. Produce a predetermined marketing budget (say $100 to $200 million), and use the remaining funds to make the slate. That would be challenging, and considering such a tiny number could even be foolish. Still, as I previously mentioned, Amazon’s electronic-retail platform (and hence its implied direct-marketing efficiencies) might more than makeup for many television ad purchases. Additionally, it would be a worthwhile experiment to forgo top-line revenue in favor of profitability (and the ultimate transition to streaming on the basis of a 45-day window).
Let’s now focus on the stock itself.
The business is managing a threat from the recession that will affect customers. A complex equity to own would result from adding price decreases based on valuations utilizing bear-market discount rates and a lack of free cash flow.
Given its historical performance, this industry leader in online retail is currently trading at a favorable price.
Given that the market anticipates continued suffering, long-term investors building up a position should be conscious that several purchases will be required to raise the cost basis. For a business like Amazon, it might be worthwhile.
It’s time for Amazon Studios to implement a multiplex approach. The company’s IP/storytelling/streaming assets can grow to be yet another hedge against the commerce business model by strengthening the filmed entertainment sector and Prime Video.
Again, the danger is sliding into Hollywood’s pitfalls, where outside tech funding is frequently perceived as a wasteful source from which to guzzle eagerly.
Jassy will have a hit on his hands with Amazon Studios as it develops a library of original material that debuts in cinemas first if he is cautious not to overpay stars and places emphasis on concept over notoriety, even if that means box office records remain unbroken for Amazon.
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