How MGM Helps Transform Amazon Prime Video

Amazon (NASDAQ: AMZN) made its second multibillion-dollar investment in streaming content of the year with the acquisition of MGM Studios for $8.45 billion. The deal follows Amazon's renewed partnership with the NFL for exclusive rights to an expanded Thursday Night Football schedule, starting with the 2022 season, which will cost about $1 billion per year.

After spending $11 billion on content across its Prime Video, Prime Music, and transactional video-on-demand service in 2020, Amazon's quickly catching up to the industry giants like Netflix and Walt Disney. It's all part of a strategy to transform Prime Video from a Prime add on to a must-have streaming service.

A family sitting in their living room streaming video on a laptop.

Image source: Getty Images.

What Amazon gets with MGM

MGM brings quite a bit to the table that could help Amazon compete in streaming.

First, it brings production capacity. One of Amazon Studios' limitations in original films and television was that it only had so many projects it could take on at once. As a result, it's paying a lot in licensing fees to film studios receiving more bids than ever from streaming services. With MGM, it adds a mini-major film studio and brings on a TV studio that produced nearly 1,000 episodes of television in 2019.

Second, it adds valuable intellectual property (IP) such as James Bond and Rocky. The modern playbook for media companies includes using popular intellectual property to build franchises and expand into new content verticals. Disney has proven extremely adept at leveraging its IP with expansive Marvel and Star Wars universes and tapping the well of classic Disney characters every year with great success.

Amazon's still searching for an ultra-popular title to draw repeat viewership to its Prime Video service. Netflix seems to have a constant stream of top-tier series debuting on its service every month.

Amazon will come out with an ultra-expensive series based on Lord of the Rings, but it's a lot easier and less expensive to make series based on IP that the company owns. Using MGM's characters could help produce another hit. (Note: Barbara Broccoli's Eon Productions still co-owns James Bond with MGM, and Broccoli has been hesitant to greenlight TV series based on the characters.)

Finally, Amazon will gain access to MGM's back catalog, which includes 4,000 films and 17,000 television episodes. MGM currently licenses those titles to various streaming services, as well as its own EPIX network.

Amazon will have the option to retain more of that library exclusively as existing deals expire. Priority for MGM's content may prove extremely valuable in the future, as ongoing media consolidation and more companies offering direct-to-consumer services leave very few studios willing to make exclusive output deals for streaming.

The overall result could be a substantial increase in annual content spending for Amazon as it expands original productions and licenses more content from MGM. That's on top of the purchase price. But those investments come with the expectation of increased Prime Video engagement.

Building a streaming video destination

The MGM acquisition fits into Amazon's overall streaming strategy to make Amazon Prime Video a true destination for streaming entertainment. While Amazon managed to attract 175 million of its 200 million Prime members to its streaming service over the last year, the video service is seen as an add-on to the shipping service instead of a means of attracting new subscribers.

Amazon snagged a few high-profile films last year amid theater shutdowns -- Borat and Coming 2 America -- which attracted strong viewership. Meanwhile, consumers who exhausted Netflix or Disney+ may have decided to see what's available on Prime Video since they already pay for Prime.

The addition of MGM, the production capacity, IP, and back catalog could help bring viewer-engagement levels with Amazon more in line with the largest competitors in the space. On top of that, millions of football fans will log in every week in the fall, and LOTR (Lord of the Rings) fans could have dozens of hours of new content to binge with a five-season commitment to its massive Tolkien-based series, starting with a 20-episode first season with a budget of $465 million.

The goal is to make Prime Video more of a destination for streaming instead of an afterthought. Not only could increased engagement with Prime Video lead to greater Prime retention rates and more shopping on its online marketplace, but it could also lead to broader adoption of Prime Channels. This would deeper entrench Prime into the home entertainment ecosystem and strengthen its customer relationships.

If it strengthens the appeal of the Fire TV platform, Amazon could benefit from greater ad revenue, as well. That's what allows Amazon to justify spending as much as media giants like Netflix and Disney: It has more ways to monetize engagement.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Netflix, and Walt Disney. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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