How Amazon's Original Content Increases Prime Memberships

The streaming video industry has long been something of a black box. Linear TV gauged the success or failure of its programming by the percentage of viewers compared to its peers. Streaming services, on the other hand, have been notoriously secretive about their viewership data. Streaming pioneer Netflix (NASDAQ: NFLX) has repeatedly said that ratings are irrelevant because they're tied to an outdated advertising paradigm -- which the company famously doesn't use on its platform. (NASDAQ: AMZN) is Netflix's biggest rival in the space via its Prime video offering, and the company has also been reticent to divulge viewership data for its original programs. It has also never revealed subscriber data for its Prime loyalty program, or how many people actually avail themselves of the streaming video service it offers free of charge to Prime members.

Now, some of those numbers may be out of the bag.

A rare glimpse

Amazon had added an extra 5 million worldwide Prime members by early 2017, due to the strength of the company's slate of original programming, according to a report by Reuters. Internal documents cited in the report show that Amazon's streaming video service attracted an audience of about 26 million customers. By comparison, Netflix reported 117 million subscribers worldwide in its most recent financial release.

The table below shows how Amazon evaluates the success or failure of its streaming programs. The cost per first stream determines how much the company has spent to get a customer to join Prime. In order to arrive at this metric, Amazon adds the cost of the marketing and production for each show, and divides that by number of viewers who stream that program first after becoming members. The lower the cost per first stream, the more effective the show was at attracting viewers.

Amazon credits a program with attracting a customer to begin or continue a Prime subscription if the show is the first one a viewer streams after renewing or initially signing up. This indicates that a series like The Man in the High Castle drew new members to Prime at a cost of $63, far below the annual fee of $99 collected from each member.

Amazon has made some big bets on future programming. The company paid an estimated $250 million to acquire the rights to The Lord of the Rings and plans to develop a multiseason prequel and potential spinoff based on the J.R.R. Tolkien classic. The production costs and advertising could bring the total cost closer to $500 million.

Is it worth it?

Streaming video may seem a strange side business for the e-commerce giant, but as Amazon CEO Jeff Bezos explained at an event last year, "When we win a Golden Globe, it helps us sell more shoes." He went on to say that Prime members spent more than non-Prime members, and streaming customers renewed at higher rates than those who didn't watch Prime video.

Amazon has never revealed detailed spending habits of its members, but others have come up with estimates. Consumer Intelligence Research Partners believes the company has 90 million Prime members in the U.S., and that those members spend $1,300 per year on average, compared to about $700 per year for non-members.

It appears Amazon's streaming video strategy is selling more shoes as well.

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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. Danny Vena owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.