Amazon's Next Prime Benefit Could Finally Convince You to Cut the Cord

By Markets Fool.com


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Live sports are one of the few things keeping many cable subscribers from cutting the cord. But fans interested in sports like tennis, soccer, and auto racing may not have to subscribe to an entire cable package just to get the two or three channels that show those sports. Amazon (NASDAQ: AMZN) is reportedly in talks to acquire the streaming rights to sports leagues with relatively small appeal in the United States, but which hold considerably larger interest internationally.

Disney'sESPN plans to launch a stand-alone over-the-top service for smaller niche sports as well. Twitteris spending heavily on the rights to stream broadcasts of Thursday Night Football, weekly games from the MLB and NHL, two new shows produced by the NBA, and 150 games from the Pac-12 conference.

Amazon is still only in talks, but many people could soon get their sports fix without a television set, let alone a cable subscription.

Hey, big spender

Amazon has been investing heavily in Prime Instant Video for the last couple years. CFO Brian Olsavsky said the company plans to double its spending in the second half of this year compared to last year.

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A significant chunk of that investment will be in original TV series and movies. Mr. Olsavsky says it plans to triple the number of new originals it releases on Prime Instant Video.

Amazon lumps its content spending in with its "technology" expense, which includes its R&D and costs associated with Amazon Web Services, its cloud computing business. But last year, it spent $12.5 billion on technology and content, a 35% increase from 2014. Through the first half of the year, technology and content expenses are up another 28%.

Analysts estimate that only $2 billion of last year's $12.5 billion was for content. So, Amazon is likely planning to spend between $3 billion and $4 billion on Amazon Prime content this year.

For reference, ESPN is paying nearly $2 billion every year just for Monday Night Football rights. On the other hand, Twitter was able to acquire digital streaming rights for 10 Thursday Night Football games for just $10 million. The key difference is that Twitter is simply rebroadcasting the television broadcast and has relatively little ad inventory while ESPN receives the rights to the vast majority of ads played during games.

Which kind of deal Amazon is looking for is unclear, but it's likely more interested in deals like Twitter's. Amazon Prime is already designed to generate revenue from membership fees and the incremental shopping from its members on Amazon's retail site. That would significantly reduce the amount Amazon would have to spend, but it could also limit the options available. Deeper pockets could block Amazon from acquiring digital rebroadcast rights to television broadcasts.

All about the international market

Amazon is mostly focused on sports rights with an international appeal including French Open tennis, rugby, auto racing, golf, and soccer.

That's in part because those rights are significantly less expensive than the big four sports -- football, basketball, baseball, and hockey. But Amazon has also already reached significant penetration in the U.S. with Prime. Consumer Intelligence Research Partners estimates Prime has 63 million members in the United States.

Amazon's growth in international markets hasn't kept up with its domestic sales growth in recent years. Last year, international sales increased less than 6% year over year. Comparatively, U.S. sales improved 25%. The margin has closed through the first half of 2016, but U.S. sales growth remains slightly ahead of international sales growth (27.5% vs. 26.8%) despite the larger revenue base.

Amazon has greatly benefited from the growth of Prime in the United States, as Prime members generally spend more on Amazon and stay more loyal to the retailer. Prime is also available in 12 international markets, but those represent a small minority of overall Prime subscribers.

Adding sports rights with major appeal to European customers -- like soccer -- could generate more sales of "power tools and baby wipes" in the region, as CEO Jeff Bezos wrote in his letter to shareholders last year.

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Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com, Twitter, and Walt Disney. 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.