Is Amazon's HBO Deal All It's Cracked Up To Be?

Apr 23 2014, 4:58pm CDT | by made a big deal Wednesday morning about its licensing agreement with Time Warner's Home Box Office.

It may be a while before the agreement is really meaningful.

The deal allows Amazon’s Prime Instant Video service to make available exclusively streaming versions of a number of hit series including “The Sopranos,” “Six Feet Under,” “The Wire,” “Treme,” “Big Love,” early seasons of “Boardwalk Empire” and “ True Blood” as well as “Band of Brothers” and “John Adams.”

It sounds good, but it doesn’t include such current HBO hits as “Game of Thrones.”

Small wonder then that investors appeared to yawn at the news. The shares were down $4.29, or 1.4%, to $324.69 late Wednesday, a day before Amazon is to release its first-quarter results. The shares were rising after hours, however.

As often is the case with Amazon, the news contained some omissions as well as some downsides. No fee is mentioned. Morgan Stanley analysts priced it at $200 million to $250 million over the term, assuming a fee of $200,000 to $250,000 an episode.

The deal is described as multi-year, but how many years that entails is not clear. Three years is most likely.

Second, at least in the short-term, it’s not clear what Amazon Prime will get from streaming old shows. There’s little data on the demand for streams of, say, “Field of Dreams” or “The Godfather.” But it’s probably nowhere near the demand for “Game of Thrones” or “Veep,” the comedy starring Julia Louis-Dreyfus.

Besides, it looks like the heart of the deal comes later in the year when HBO puts HBO Go on Prime Instant Video. HBO Go is the online service that lets subscribers view films and shows on demand and see other materials. And that, presumably, would make current hits accessible.

And, again, there is nothing in the release suggesting the dollar value of the deal.

Nor is there any mention of the on-going battle between video providers and companies like AT&T and Verizon Wireless about how much additional traffic Amazon could push onto the Internet.

Netflix, Amazon’s biggest rival, saw its shares tumble 5.2% to $353.50 on Wednesday because not getting access to the HBO library could limit customer growth. HBO reportedly offered the library only to Amazon.

Apple shares also fell 1.3% to $524.75 in regular trading, presumably because of the effect of the Amazon deal on its programming prospects. (The shares took off after hours after Apple beat earnings and revenue estimates, a 7-for-1 stock split and a $130-billion capital return program.)

But let’s go back to the effect on Amazon’s bottom line. In March, Amazon raised its annual subscription fee for Prime members to $99 from $79. It had an estimated 23 million Prime subscribers in March. So, assuming no change in Prime subscribers, the increase could boost revenue by $460 million a year. The HBO deal may cut the benefit of that fee increase by, say, $67 million to $83 million a year.

There’s a reason for the interest in Prime customers. They spend much more on Amazon than non-Prime customers. One study says Prime customers spend an average $1,340 a year, compared with $650 for the other customers.

Amazon needs benefits to keep the churn level down on the subscriber list. Piper Jaffray analysts put the churn at 5%; the Motley Fool has estimated 7%. So you offer those obviously valuable customers free shipping, HBO and a host of other incentives./>/>

Amazon is under pressure to show growth in earnings per share. The shares have fallen about 20% since peaking at $408.06 intraday on Jan. 22.

The consensus Street estimate is that the company will report 23 cents a share for the first quarter, up from 18 cents a year ago, with revenue rising 21% to $19.4 billion. In its January earnings report, the company projected first-quarter revenue of $18.2 billion to $19.2 billion and operating income of -200 million to $200 million. A $200-million operating profit would mean an operating margin of slightly more than 1%.

A beat on the earnings could give the shares a boost.


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