Why Is Amazon Burning $4.5 Billion This Year?

Prime makes plenty of sense for Amazon

Amazon (AMZN) will spend ~$4.5 billion on video content this year in an escalating video war with Netflix (NFLX), according to analysts at JPMorgan Chase.

Amazon doesn’t disclose its video budget, though it outbid Twitter (TWTR) this year for the rights to stream NFL’s Thursday Night Football games live to Prime Video subscribers. It paid $50.0 million for the rights, five times what Twitter paid last year. This live sports rights spending is likely part of its estimated $4.5 billion video budget.

Why Is Amazon Burning $4.5 Billion This Year?

Amazon is hoping to use live sports to draw more subscribers to the Prime program. Getting more people on Prime has multiple benefits for Amazon. First is the membership fee. Prime members pay $99 per year or $11 per month to retain the service, which also allows them to shop on Amazon.com and enjoy free shipping.

Prime subscribers are also heavy spenders on Amazon purchases compared to regular shoppers.

Subscription revenue

Amazon reported retail subscription services sales of ~$1.9 billion in 1Q17, a rise of 49% annually. These subscription sales include fees that the company charges on its Prime memberships. The company hasn’t revealed how many people use Prime, but Consumer Intelligence Research Partners estimates that there are 80.0 million Prime subscribers in the United States (SPY).

Reducing reliance on e-commerce

As the e-commerce industry becomes more competitive, with legacy retailers such as JCPenney (JCP) upping their online games, Amazon is keen to unlock new revenue streams outside of the retail space. Prime is one of its bets, not just for the subscription fee income, but also for its potential to expand Amazon’s opportunities in the subscription video and digital advertising markets.

Amazon offers a standalone streaming video plan akin to Netflix’s that costs $9 per month.