Amazon Goes After Netflix by Doubling Its Spending on Video

By Markets Fool.com

There was a time not very long ago when it was possible to have nothing to watch.

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Before DVRs, streaming video, and cable being a home for quality television shows -- not just ones involving bikini-clad police officers on bikes -- the pool for high-quality programming, even decent shows, was pretty shallow. You had the major networks, which catered to an older crowd, and HBO, which offered top-tier shows, but came at a premium price.

Over the last few years, however, that has changed as high-quality original programming has exploded. In addition to Netflix (NASDAQ: NFLX), which produces numerous high-end dramas and comedies, a number of cable channels have upped their standards and even the broadcast networks score with breakout, innovative hits like The Blacklist on NBC orFOX's Empire.

Amazon(NASDAQ: AMZN) has been part of that original programming revolution as well with its Prime Video service. That has led to shows like Transparent, which, while not necessarily a breakout hit when it comes to audience numbers, has been a prestige show that has announced the online retailer as a major player. The same can be said, perhaps to a lesser extent, for Man in the High Castle, another well-regarded show that has earned Amazon buzz and maybe subscribers.

Now, after being a smaller player compared to Netflix, Amazon has decided to step up its game and massively increase its video spend in the second half of 2016 as compared to the previous year.

Amazon is increasing its production of original shows. Image source: Amazon.

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What is Amazon doing?

It's important to note that Amazon (like Netflix) does not break out its programming costs. For the online streaming leader, it's easier to extrapolate a guess at the number, based on what the company does report and the fact that video is its only business. In Amazon's case, the budget for video is not reported and the company is so diverse that it's hard, if not impossible, to pin down an actual number.

What Amazon did say during its Q2 earnings call, as transcribed by Seeking Alpha, is that it will be spending a lot more money and producing a lot more shows.

"We are also nearly doubling our content spend in the second half of this year versus the second half of 2015," said CFO Brian Olsavsky. " We have a great slate of new Amazon Originals coming out later this year, both in the U.S. and internationally. And we're nearly tripling our number of new Amazon Original shows -- TV shows and movies compared with the second half of last year."

What does this mean?

Amazon Prime Video started as good-enough service designed to make joining or renewing membership in the company's $99-a-year Prime service more attractive. At launch it had a decent archive of older shows and eventually it added original programming, but until Transparent, nothing that really broke through and demanded your attention.

Recently, however, Amazon has clearly begun to see the streaming service as its own draw, not just a way to keep people on board with their free-shipping membership. It's now possible to join Prime Video on its own for $8.99 a month and Amazon has made major content deals with Woody Allen and the former hosts of BBC's Top Gear.

This latest talk about spending simply makes it official that Prime has become a bigger priority and the company clearly believes that it can be a player in the streaming space. Adding more original content would help the company compete with Netflix -- assuming it can deliver hits -- and doing that requires bigger budgets.

Amazon has already shown a willingness to fight a bidding war (as it did to secure the services of the Top Gear hosts) and now it's admitting that it will spend more money to produce more shows. That's a risky strategy for a company that has not delivered a true breakout hit when it comes to viewing numbers, but the potential to build on what it has clearly outweighs the risk for the online retailer.

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Daniel Kline has no position in any stocks mentioned. He has Amazon Prime and has never watched an original on the service. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.