Why Did Amazon Buy MGM?

When we look under the hood of the Amazon business model we find out a web of sub-business models, which in part are all tied together, in a massive platform/business ecosystem.

how-does-amazon-make-money — Amazon has a diversified business model. Amazon’s primary revenue streams comprise its e-commerce platform, made of Amazon labeled products and Amazon third-party stores. In addition to that, Amazon makes money via third-party seller services (like fulfilled by Amazon), advertising on its platform, AWS cloud platform, and Prime membership.

More broadly we can break down the Amazon business model within two major business platforms, one for consumers and another for enterprises/B2B:

Amazon e-Commerce Consumer Business Platform: The e-commerce platform is also the consumer-facing part of the business. This comprises all the business lines that go from the e-commerce platform (which is made up of first-party products – the labels that Amazon owns – and the third-party products – those that are not owned by Amazon but might still be fulfilled by it). On top of that, Amazon’s whole fulfillment capability comprises all the seller services that help the e-commerce platform guarantee a wide range of low-priced products. Amazon’s advertising platform also sits there, challenging the Google-Facebook duopoly. And on top of all, Amazon Prime helps the e-commerce platform foster its repeat customer through free, fast, and quality-proof delivery.
Amazon AWS Business Enterprise/B2B Business Platform: On the other side, the Amazon AWS platform is the enterprise-side of the company, dealing mostly with large enterprises and small and medium businesses; AWS powers up a good chunk of the web. Initially developed to enable Amazon to transition into a platform (to host third-party stores), it eventually became a business for its own sake. It definitely helped power up the streaming service Amazon offers (AWS also powers up Netflix – see the concept of coopetition).

Let’s get back to Prime, and how this fits the overall Amazon business model, and how MGM might fit in the overall picture.

When Jeff Bezos – at the Vox’s Code Conference back in 2016 – said, “when we win a Golden Globe, it helps us sell more shoes,” that well exemplifies the strategy that Amazon Prime has been following. Integrated into the whole Amazon Business Model. This single statement might not make sense at first, yet it thoroughly explains the current battle to keep millions of credit cards linked to their subscriptions, be it Amazon, Netflix, Apple, or YouTube.

In addition to that, while Prime has taken life for its own sake (who knows whether in the coming decades we’ll know Amazon primarily as an entertainment company) as of now it is highly integrated into the overall Amazon business model. Indeed, one of the greatest hurdles for e-commerce to scale up is to be convenient, fast, and guarantee the item sold doesn’t get lost in the last mile delivery.

Amazon Prime solves most of these problems. As the subscribers, part of the program get a free, fast delivery, where the quality of the ordered item is usually in line with its promise (in most cases, Amazon Prime subscriptions are tied to the fulfilled by Amazon, in short, the items that Amazon has in its inventories and for which it can guarantee higher standards of shipping and delivery).

Tech companies, Silicon Valley-style, have learned a great lesson in the past decade. Indeed, to become a real giant, one that would stick to the test of time, a company’s brand needs to become a cultural phenomenon.

When Romans built up their empire, they did innovate from the engineering standpoint (scaled engineering feats like aqueducts and roads that crossed entire countries were what made a global empire possible). Still, they built upon the Pagan and Greek culture, using that as a lever to build a roman-centered empire covering most of the known (at the time) western (and in part eastern) world.

Now Amazon is doing the same. While innovating from a modern engineering standpoint. It is also leveraging on what Hollywood has done in the last century. But what does MGM bring to the table for Amazon?

As explained in its financial statements “MGM is a leading entertainment company focused on the production and global distribution of film and television content across all platforms.”

Historically MGM generated revenues by distributing its content through traditional media, like TV, Cinema, and theaters. However, as a company with a long history (it was born in 1934), it also generated revenues by licensing its content and the hits it had produced over the years.

Indeed, as the company highlighted in its financials:

We control one of the world’s deepest libraries of premium film and television content. Our film content library includes approximately 4,000 titles, including the James Bond, The Hobbit, Rocky/Creed, RoboCop and Pink Panther franchises, as well as The Silence of the Lambs, The Magnificent Seven, Four Weddings and a Funeral and many other highly recognizable titles. Our film content library also includes rights to films that have received more than 180 Academy Awards, including 12 Best Picture Awards. Our television content library includes approximately 17,000 episodes of programming, including Stargate SG-1, which was one of the longest running science fiction series in U.S. television history, Stargate Atlantis, Stargate Universe, Vikings, Fargo, The Handmaid’s Tale, Get Shorty, Condor, Clarice, Fame, American Gladiators, Teen Wolf and In the Heat of the Night, as well as our rights to or income from prominent unscripted shows including The Voice, Survivor, Shark Tank, Live Rescue, Eco-Challenge, Are You Smarter Than a 5th Grader, Beat Shazam, The Real Housewives of Beverly Hills, The Hills, and other titles.

This alone will enrich the Amazon Prime library and it might be used as a library that Amazon can have exclusive on its streaming platform.

As MGM got negatively affected by the pandemic, its content library still represents among the most compelling ones:

Above, you can see all the main content formats (from the MGM financials) that the company has built for traditional media like TV and theaters.

Part of the MGM business model also was skewed toward digita licensing to platforms like Amazon Prime Video, Hulu and Netflix.

The MGM revenues are made of three main channels: Film Content, Television Content, and Media Networks.

Within the film content television licensing is the primary revenue stream, where Theatrical revenue had been almost zeroed out by the pandemic.

In television content, the licensing also comprises the content passed to SVOD (streaming platforms).

Here the main driver of revenues is the fully-owned subsidiary, EPIX, which is a cable network.

Key takeaways

Amazon Prime – a company in its own sake – is also a key ingredient to the overall consumer-facing e-commerce platform. It serves to foster the Amazon repeat customer to guarantee speed, convenience, and quality.
Over the years, Amazon learned, more Amazon subscribers also meant more e-commerce customers and more repeat transactions; from there, the streaming service became a key part of the overall Amazon business strategy.
MGM, an iconic entertainment company, will bring to the table a vast library of content that can be licensed exclusively for Amazon Prime (thus revamping Prime and giving a blow to Netflix) while also giving access to traditional media like Television and Cinema.

Is Amazon finally mastering the Hollywood playbook in Silicon Valley style?

All you have to know about Amazon: