* Amazon's Epix deal includes pay-for-performance provision
* Amazon pays more than Netflix on per-sub basis-execs
* Amazon spends $1 bln/yr on streaming video content-analyst
By Alistair Barr
SAN FRANCISCO, Oct 9 Amazon.com Inc's
deal to purchase streaming movies from cable network Epix could
transform the way such deals are done, thanks to a
pay-for-performance sweetener that had not been previously
According to an executive directly involved in the deal,
Amazon agreed to an earn-out provision payable to Epix over time
if the number of subscribers to Amazon's Prime Instant Video
service rises above a certain threshold. That comes in addition
to a fixed upfront fee, the basis for most subscription
video-on-demand deals up to this point.
The generous terms of the deal, announced in September,
provide the strongest evidence yet that Amazon is willing to pay
up to be a player in this market as it faces a dwindling demand
for DVDs - once its core entertainment offering - and tough
competition for its Kindle Fire tablets.
Film studios and TV network executives, meanwhile, now have
a worthy foil to play against Netflix - once the only major
streaming player - and possibly a template for future deals.
"This could be considered online video deals 2.0. After
doing 1.0 deals mostly with Netflix and a few with Amazon, it
dawned on the media companies that they may want to get a piece
of any future growth too," said Goldman Sachs media analyst Drew
The deal with Epix - a partnership between Hollywood studios
Paramount Pictures, Metro-Goldwyn-Mayer, and Lionsgate -
was structured so studios could capture any rapid Prime Instant
Video growth, according to the executive involved in the
Amazon did not respond to a request for comment on details
of the deal. An Epix spokeswoman also declined to comment.
But Epix Chief Executive Mark Greenberg did say of Amazon:
"Internet delivery of content is a way in which a new, emerging
younger audience wants to view content, and they know they can
be a significant player in the space, we are happy to help them
Epix previously had a deal with Netflix, which had
been paying $200 million a year since 2010 for exclusive rights
to the network's movies. When that exclusivity period expired,
Amazon swooped in and quickly struck a three-year partnership to
add about 3,000 movies from Epix to Prime Instant Video.
The deal sent a message that Amazon, which has not had a
reputation for paying richly for anything, was serious about its
digital video ambitions and was willing to spend hundreds of
millions of dollars to secure content.
"There are times when it's frugal to make big productive
investments," said Roy Price, head of Amazon Studios, Amazon's
Hollywood studio. "When there are opportunities to do that we
will do that."
HOLLYWOOD'S NEW BEST FRIEND
The studios are going to benefit.
"Hollywood loves it because they can say Amazon is paying us
X and we want more from you," said Michael Pachter, an analyst
at Wedbush Securities in LA. "It's a club they can use to beat
Netflix over the head."
A Netflix spokesman declined to comment on the structure of
its content deals.
"We never thought that we were going to operate without
competition," Ted Sarandos, Netflix's chief content officer,
said during an investor conference last month. "We were
surprised that it has taken this long for anyone to really
emerge in a meaningful way."
Amazon's Prime Instant Video service has more than 25,000
titles now, but that is still about half the number available on
In addition to Netflix, Amazon also competes with Hulu, run
by Jason Kilar, one of Amazon's former executives, which has a
subscription video service called Hulu Plus. Earlier this year,
Comcast Corp launched a rival called Streampix and
Verizon and Coinstar's Redbox are expected to
launch a competing service soon.
While Amazon's streaming deals cost less than Netflix's in
raw dollar terms, it pays more on a per-subscriber basis,
according to media executives and Wall Street analysts.
Amazon offers its streaming-video-on-demand service (SVOD)
as a feature of its Prime program, which charges $79 a year in
the United States for free two-day shipping on most products the
The company does not disclose subscriber figures for its
Prime service. But some media companies that have done streaming
video deals with Amazon have seen the data. One executive who
has seen the figures told Reuters Amazon has about 9 million
Prime subscribers. Prime Video subscribers - Prime members who
have used the streaming service - total between 3 million and 4
million, this person said.
Netflix's larger customer base - it has about 25 million
streaming video subscribers in the United States - means its
total cost in licensing deals is typically higher than Amazon's,
said the executive. But Amazon's cost basis, when adjusted for
subscribers, is typically higher since its customer base is
Amazon does not disclose how much it pays for content.
Barclays analyst Anthony DiClemente estimates that Amazon spends
about $1 billion a year on content for its streaming service
while Netflix spends close to $2 billion a year.
Netflix shares dropped as much as 11 percent the day
Amazon's Epix deal was unveiled, although they have recovered
Netflix stock jumped more than 10 percent on Monday after
Morgan Stanley upgraded the company, saying Amazon was unlikely
to separate its streaming video subscription service from its
broader Prime offering, making it less of a direct competitor.
However, keeping Prime Instant Video packaged with its Prime
shipping program will help Amazon pay more for video content,
because it can subsidize content costs from profits made when
Prime customers buy more physical products through the company,
Wedbush's Pachter said.
THE IMPORTANCE OF PRIME
Amazon, which ranks as the world's largest Internet
retailer, has been a leading purveyor of DVDs, but sales are
falling as more viewers download and stream video instead.
The downward spiral of DVDs sales dovetails with Amazon's
face-off against Apple Inc in tablet computing. Amazon
is pricing its Kindle Fire devices lower than Apple's iPad with
the aim of using it as a loss-leader to generate profit from the
products and services consumers buy on its site, including
digital movies, TV shows and books.
That means that gaining access to digital movies and TV
shows is crucial for Amazon's future.
Since the middle of 2011, Amazon has announced streaming
video deals with more than 10 media companies, including
NBCUniversal, part of Comcast, News Corp's Fox, and
ABC, part of Walt Disney Co.
Amazon has been selective about which content it will buy,
in contrast to Netflix, which has opted to pursue a broader
range, according to media executives who have done deals with
"The fact that they have spent a lot of money on a few
things has been very interesting," said Netflix's Sarandos
during last month's investor conference. "We're obviously
keeping a good eye on it."
Some media companies are treading carefully with Amazon,
though, given its track record of driving prices down.
In the book and e-book market, where Amazon grew to be the
dominant player, it has battled publishers for the right to set
its retail prices below wholesale.
Amazon will have more difficulty commoditizing movies and TV
shows because it is competing for content with a growing list of
streaming video on demand rivals. And Hollywood controls how and
when its content is distributed more tightly, with big-budget
films traditionally heading to theaters first, followed by DVD
and pay TV.
For example, one media company has short-term agreements
with Amazon that allow for quick exits if the deal does not go
according to plan, said an executive.