Amazon has watershed week as content producer

As production and licensing expenses increase, Amazon and Netflix may have to adopt an ad-supported model

It's been a week of milestones for Amazon's ambitions as content producer, as it makes its way down a path paved by another Internet-based company -- Netflix. Both companies are now giving legacy producers of quality TV content a run for their money, potentially forcing a greater disruption in the industry than ever before.

Amazon, a company known for online shopping and cloud computing services, on Tuesday announced that filmmaker Woody Allen would produce a television series for Amazon Studios. The news come after Sunday's Golden Globes Awards show where "Transparent", a comedy produced by Amazon that depicts the lead actor coming out as transgender, won two categories, including best comedy and best actor in a comedy, beating shows from established networks like HBO and Showtime.

"I don't think a lot of folks have thought of Amazon as a player prior to that. Netflix was already a player. For Amazon, it was a validation," said Deana Myers, senior analyst at media research firm SNL Kagan.

Original programming from Netflix also earned top honors at the awards show. The company's political drama "House of Cards" won best performance by an actor in a drama in addition to being nominated for best drama and best actress in a drama. "Orange is the New Black", a Netflix comedy set in a women's prison, was nominated for best comedy; also from the show, Taylor Schilling had been nominated for best actress in a comedy and Uzo Aduba had been nominated for best supporting actress.

While people still tune in to networks and cable operators to watch television of course, people will consume quality content regardless of its distribution platform, said Jim Nail, a principal analyst at Forrester Research.

"Even as broadcast is taking a lot of hits these days, it's still the ruling king of entertainment. But what the Golden Globes says is that content is the emperor. Great content, no matter where it comes from, is recognized and viewed," said Nail, adding that in addition to Netflix and Amazon, shows airing on smaller networks are also attracting viewers.

Since Amazon and Netflix's operations are rooted in IT, those companies turn to technology to determine what shows to develop. The troves of user data they have access to give them an advantage over broadcasters and cable networks, said Nail.

"They understand what the viewers like and what they don't like. They have more rigorous data than a studio executive does," he said.

User data played a guiding hand in Netflix's decision to develop "House of Cards." The service, which streams licensed television shows and movies in addition to original programs, determined that a political drama would attract viewers after crunching programming data. Like Netflix, Amazon licenses and streams content including movies and television shows.

Using the Internet as a distribution platform also offers an edge over traditional broadcast networks, said Myers. Unlike broadcasters and cable networks, Netflix and Amazon don't have to worry about appeasing advertisers, she said.

"They can get specific niche genres where networks need to do broader programming," she said.

But with production and licensing costs climbing, the subscription model may eventually be replaced with a revenue stream that provides greater capital, said Nail.

Under a subscription model, the math doesn't work in Amazon and Netflix's favor. There's a finite number of people willing to pay for online content.

"There's a relatively low ceiling on what their subscriber base will be. At some point they'll have to develop an ad-supported model," he said.

People still turn to Amazon for shopping, not television, said Myers, a point reflected in the type of membership required to watch Amazon programming. The content is only available to people who sign up for a US$99 Amazon Prime membership, the main benefit of which is free two-day shipping for a year.

"People who buy Prime buy it for shipping," she said, adding that Amazon's video products probably aren't profitable.

While Amazon hasn't been too fussed about producing a profit -- the company is famous for barely making money -- producing original, exclusive programming with the high-profile talent Amazon has signed is expensive.

"Woody Allen isn't cheap," said Myers.

Competition will only increase and drive up costs as cable networks and broadcasters as well as Amazon and Netflix continue to develop original shows, she said.

"At some point it's going to be too expensive for everyone to be in the market. They have the one revenue stream of subscriptions," said Myers.

For now, though, two of the hottest television viewing platforms aren't traditional broadcasters.

"Amazon and Netflix are viewed as being able to attract young, tech-savvy audiences. They're both considered the cool kids," she said.

Fred O'Connor writes about IT careers and health IT for The IDG News Service. Follow Fred on Twitter at @fredjoconnor. Fred's e-mail address is fred_o'

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