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Why Amazon Expects Content Costs to Increase in 3Q15

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Sep. 18 2015, Updated 12:07 p.m. ET

Amazon expects its spending on content acquisition to increase further in 3Q15

Amazon’s (AMZN) spending on technology and content continues to increase at a fast rate. As the chart below shows, the company’s spending on technology and content as a percentage of revenues increased from 10.4% in 2Q14 to 11.6% in 2Q15. The fourth quarter of 2014 was an exception when this metric declined mainly due to the leverage that it received from higher revenues in the holiday season.

Amazon now expects spending on content acquisition to increase further in 3Q15. During its conference call to announce 2Q15 earnings, the company mentioned that it is looking to acquire rights of extensions to a lot of successful shows. This includes shows like Man in the High Castle and Hand of God.

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Amazon faces stiff competition in a bid to acquire content

Video-streaming players compete for content acquisition, for which they are willing to pay higher fees. According to a report by The Wall Street Journal citing RBC Capital Markets’s estimates, Netflix (NFLX) could spend $3.3 billion this year on content acquisition. Comparatively, Amazon is expected to spend $1.7 billion and Hulu $1.5 billion on content acquisition in 2015. Hulu is jointly owned by Fox Entertainment Group (FOXA), Disney (DIS), and NBCUniversal (CMCSA).

To gain diversified exposure to Netflix, you can invest in the SPDR S&P Retail ETF (XRT). XRT invests 1.3% of its holdings in Netflix.

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