Bezos to Amazon Studios: Go Big or Go Home

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Last week, Amazon (NASDAQ: AMZN) announced it was canceling three shows on its Prime service: I Love Dick, One Mississippi, and Jean-Claude Van Johnson (I know readers everywhere will miss that one). The cancellations follow the September cancellations of Z and a number of other projects in development. These cancellations might seem rather curious, as it had been reported Amazon would be increasing its content spend in the year ahead, not decreasing it.

The cancellations aren't about scaling back Prime Video, but rather about making room for bigger, more audacious shows, per the directive of CEO Jeff Bezos. In September, he told Amazon Studios to pivot away from smaller indie fare in order to focus on finding the next big hit such as Game of Thrones. Here's why.

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Bigger bets

The change in strategy may seem somewhat curious, given the success of many of Amazon's niche-like shows to date. The Marvelous Mrs. Maisel won the Best Comedy award at this year's Golden Globes, and other Amazon productions with an indie feel, like Transparent, Mozart in the Jungle, and Manchester by the Sea have won Golden Globes, Emmys, and Oscars in recent years.

And while none of these shows are being canceled, it seems Amazon is realizing what big film studios realized in the beginning of the 21st century: Once you're big enough, your financial success largely depends on big, mass-market films and shows that can travel overseas.

In September, before he resigned amid sexual harassment allegations, Amazon Studios chief Roy Price said:

Strategy follows Prime growth

The shift doesn't necessarily mean Amazon's previous strategy was a failure -- quite the contrary. As Prime was just getting off the ground, the studio's executives were steered toward making prestige fare that could win awards and gain recognition for Amazon as a serious player.

This strategy may have helped to attract particularly affluent families to the prime family, especially in the higher-income regions of the North East and West Coast (Mrs. Maisel and Mozart in the Jungle are both about New York artists, and Transparent is about a well-off, yet dysfunctional, Los Angeles family). By mid-2016, Prime had captured 70% of households making more than $112,000 per year.

But once the mass affluent demographic is saturated, the continued growth of Prime is likely to come from lower-income households. In 2016, Amazon began offering Prime in monthly payments of $10.99, aiming at households that might not be able to afford the annual $99 subscription at one time. That seemed to work, with an R.W. Baird study showing that Prime grew fastest among households making less than $50,000 per year in 2017.

Just last week, Amazon raised the price of the monthly subscription to $12.99, while leaving the annual subscription price unchanged. That's clearly aimed at inducing lower-income customers to sign up for the annual subscription and perhaps to rein in increasing shipping losses.

Because Netflix (NASDAQ: NFLX) and Costco (NASDAQ: COST) each raised their subscription prices earlier this year, it seems Amazon is in the clear for now. But it may need to raise its annual Prime subscription price down the road. A big hit with Prime Studios that induces water-cooler conversation and cuts across demographic lines could certainly help soften that blow.

Primed for Frodo

In November, Amazon bought the TV rights to the Lord of the Rings franchise, which certainly fits the bill of attempting a Game of Thrones-like hit. The company is apparently planning the series to be a prequel to the Tolkien books (and Peter Jackson films), saying in a statement that the series will "explore new story lines preceding J.R.R. Tolkien's The Fellowship of the Ring."

This signals that Amazon may be taking a page out of Disney's (NYSE: DIS) playbook, purchasing a well-known universe of characters upon which it can launch prequels, sequels, and spinoffs. That certainly worked for the House of Mouse over the past decade, with the phenomenal success of many Marvel and Star Wars films.

The bottom line: As Amazon Prime scales to more than half of U.S. households, and the company eyes international markets like India, its video content needs to scale along with it. That means making big, must-watch spectacles -- so now may be the time order that 4K TV (via Amazon Prime, of course).

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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. Billy Duberstein 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 Costco Wholesale. The Motley Fool has a disclosure policy.

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