$50M → $1B Budget in 1 Year

What it took for Amazon to win with Prime Video 

When Bill Carr recruited me to Amazon in 2011, the company had just bought LoveFilm and launched Amazon Prime Video. The timing was… interesting. Netflix’s stock was way down, and they were about to split their DVD and streaming businesses. The opportunity was there for Amazon to make waves in the space, but it wasn’t pre-ordained that we would become a leader in digital video. In fact, although we were one of the largest companies in the space, we had a shaky track record in music and video up to that point. 

That’s why they hired me as the Global Head of Digital Video. My job was to make Amazon credible in a category where we simply weren’t.

The Building Blocks

By this time, the Kindle had done well and Amazon was the leading distributor of ebooks.  Kindle was a digital extension of the book business, and video streaming built on that same idea. Kindle was to books what video streaming would be to DVDs.  Amazon at that time was one of the top retailers of physical media; CDs and DVDs.  

The success of Kindle gave Amazon a way to be not just a retailer, but the provider of the actual reading experience. It significantly broadened Amazon’s engagement with its customers. 

Given this success and learning, Amazon wanted more ways to engage customers daily. We wanted to expand upon this strategy to be an early mover in digital video and streaming.  We could offer a way for customers to be able to watch videos without having to wait for a DVD to be delivered.  In fact, in a relatively short period of time - unlike in books - digital video effectively supplanted physical media (DVDs).

The original vision and execution for Amazon Video was based on buying and renting movies individually, but Netflix had shown the attraction of a digital video streaming subscription.  The idea emerged to put a library of streamable video inside the Prime subscription bundle at no extra cost. At first, this seemed ridiculous. Amazon had spent hundreds of millions of dollars on this digital streaming product, and now Jeff Bezos was directing us to give it away for free. But, eventually, that “free” product turned into a multi-billion-dollar business. That’s what Jeff saw that no one else did. 

The Prime Play

Amazon Prime had already changed how people shopped online. Prime members had much higher lifetime value than other Amazon customers. So, the idea was that if video could make more people join Prime and stay, it would pay for itself. This meant shifting from a transactional model to an engagement model. We no longer wanted to make a few bucks on people buying individual videos to stream, we wanted to keep them engaged as Prime members by giving them as many videos as we could. 

But, there was an issue. At the time, Netflix was MUCH bigger. There was no good reason for someone to use Amazon as their primary streaming platform when they could go to Netflix. So, to compete, we needed a massive catalog, availability on every device people actually used, and something unique. 

We needed to get the newest movies fast. Netflix would often take years to get a new movie, so if we could boast a catalog of new releases as well as the old favorites Netflix had, we would have an advantage.  

Building out that catalog was my job, and it meant jumping our content licensing budget from $50 million to $1 billion in a single year. That is unthinkable for a new and unproven product, even today. Add in the fact that video streaming was also going to be a “free add-on” and it is a truly remarkable decision. 

The Licensing Beast  

The main hurdle we had to confront was the fact that content licensing is a heinous, plodding process. Content agreements for streaming were often for periods of five-plus years and amounts of $100+ million per deal, with no direct revenue per title. We were competing with Netflix for a lot of these deals, sometimes head-to-head, and iTunes was also now a major player in the video streaming space. 

We were trying to move fast in a drawn-out, bureaucratic landscape. 

One of the biggest breakthroughs we had was inventing a “second pay window” for streaming.

Basically, before us, a movie would go to theaters, then to sale, then rental, then about 18 months later into the “pay TV window” (HBO, Showtime, Crave). After six months it would disappear for a while before heading to cable or broadcast.

Streaming was competing in that first pay TV window, but all the best content was locked up by premium legacy networks. So, we went to studios and cut deals for a new slot — after the first pay TV run, before cable — where we could stream movies inside Prime. We got the movies before Netflix and iTunes.

That second pay window let us offer movies when people still cared about them. It was a wedge against Netflix and proof to studios that streaming could create new value without cannibalizing existing deals. And because we already had millions of Prime members, our acquisition cost was basically zero.

Why the “Free” Idea Worked

When I joined, Amazon was a minor player in online video rentals compared to iTunes, let alone Netflix. People used Amazon for physical products, not digital ones (with the exception of the newly popular Kindle). But, we knew Prime members spent about double what non-members did. If we gave customers more reasons to become members, the business would grow. Video was a way to incentivize them to join and stay. 

It wasn’t an immediate slam dunk, though. We were spending hundreds of millions (then billions) on what looked like a giveaway, and what had had a few underwhelming iterations in the past. Many people questioned whether it made sense. In hindsight, it does. At the time, it was a high-stakes bet that could have hurt the company if it didn’t work.

Even once things were up and running, licensing at scale was brutal, global rights were complicated, regional deals were slow, and the prices were enormous. But, we had the user data to know exactly what would work. We knew the types of shows that were popular, the actors everyone loved, etc. 

We knew exactly what people wanted to watch, so we set out to make it ourselves. That way, we could avoid all the licensing issues and costs. That’s why we built Amazon studios, and that is a whole other chapter of Amazon’s story.