Is Amazon Wasting Money on Video Content?

Amazon (NASDAQ: AMZN) is investing heavily in Prime Video. The company doubled its content budget in the second half of last year as it prepared to expand globally, and it produced three times as many original titles compared to the year before. Still, Prime Video accounted for just 3.2% of time spent streaming video in the United States, according to Comscore. By comparison, Netflix (NASDAQ: NFLX) accounts for 17% of watch time.

What makes the disparity even more astounding is that Amazon has an estimated 80 million Prime members in the U.S.; Netflix has just over 50 million subscribers. But Comscore says less than 17 million Prime households actively stream content from Prime Video.

With only around 20% of Prime members streaming video, some investors may see the increased investment in content as a waste of money. After all, Prime is nonetheless an extremely successful program for Amazon. But Amazon has good reason to keep investing in new content.

Getting people hooked on Prime

Amazon has a pretty high retention rate. 85% of customers renew their membership after the first year, according to Consumer Intelligence Research Partners. The culprit may be Amazon's new monthly payment option, which gives customers a lot more opportunities to cancel versus the $99 once-a-year plan.

Netflix no longer reports churn rates, but when it did, the number was usually around 4%. With increased competition and a larger subscriber base, that may have ticked up somewhat. But Netflix is still doing a better job of holding onto subscribers compared to Amazon, based on estimates.

Considering the size of Amazon Prime, subscriber retention will be key to its continued growth. A 15% churn rate implies 12 million members will leave the service in the next year. That's a huge deficit to make up for, especially considering over 50% of U.S. households are now Prime members, according to CIRP.

Keep them coming back every year

One of the best ways for Amazon to improve renewal rates is through video. On the company's 2015 fourth-quarter earnings call, CFO Brian Olsavsky said members who use Prime Video convert from free trials and renew their memberships at higher rates than those who don't.

And that makes sense. The average Prime Video user watches something on Prime five or six days a month. Meanwhile, Prime members only order something on Amazon one to four times a month. So, they're more than doubling the number of days they use Prime by watching video.

Taking that a step further, it would make sense that customers who watch original productions on Prime Video would exhibit even higher retention rates. Consumers can find much of Amazon's licensed content through other channels, but its originals are impossible to find elsewhere. What's more, viewers who are invested in a show will keep renewing year after year as new seasons come out.

Netflix has done extremely well with originals, and it's one reason many customers subscribe in the first place. A survey from eMarketer last year showed 58% of respondents claiming original shows as a reason for subscribing. In fact, more television viewers prefer Netflix's originals to those of any other network.

As mentioned, Amazon tripled the number of original titles it produced in the second half of last year. Sure, Amazon might swing and miss a lot, but as Babe Ruth said, "Every strike brings me closer to the next home run." And just like savvy investors (unlike the Babe ), Amazon can invest more in the winners and cut the losers.

As Amazon makes more efforts investing in Prime Video, it ought to attract more Prime members to the service as well as more non-members. The result should be a continued increase in members with a higher retention rate, allowing it to grow faster since Amazon won't be making up such a huge deficit.

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Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.