Big Tech’s Booming Bundles

The music, movie, and TV side hustles should scare Hollywood

Obvious statement alert: Spotify and Netflix are two fascinating companies. But what’s perhaps most interesting about them isn’t necessarily the companies that they’ve managed to build, but rather that they’ve managed to build them at all. Both set out to work within highly sclerotic industries. And both, against all odds, have succeeded.

And both will probably be the last of their kind.

I say that not because the incumbents in their respective industries will come roaring back. But rather that the giant tech companies have zeroed in on such services as being important supplements to their offerings. And it feels like it’s just the start of this trend.

Such offerings are not quite moats, but they’re more like layers of armor that make it very hard to penetrate the core of each company. You’re already not likely to quit Amazon Prime, but you’re really not going to quit if you’re into any of the content offered on Prime Video. And increasingly, you may have joined said program because of the content.

How committed is Amazon to this strategy? Per The Hollywood Reporter, this committed:

On Nov. 13, Amazon Studios beat out Netflix for a $250 million rights deal with the Tolkien estate, publisher HarperCollins and New Line Cinema that includes a five-season commitment to bring The Lord of the Rings to the small screen. With the clock ticking, Amazon must be in production within two years, according to the terms of the pact. When production expenses like casting, producers and visual effects are factored in, the series is expected to cost north of $1 billion.

That may sound crazy. But it’s actually not that crazy. Because while on the surface, this may look like an obvious loss leader, it’s more nuanced — per a recent Reuters report breaking down some internal numbers on Prime Video:

For example, the first season of the popular drama “The Man in the High Castle,” an alternate history depicting Germany as the victor of World War Two, had 8 million U.S. viewers as of early 2017, according to the documents. The program cost $72 million in production and marketing and attracted 1.15 million new subscribers worldwide based on Amazon’s accounting, the documents showed.

Amazon calculated that the show drew new Prime members at an average cost of $63 per subscriber.

That is far less than the $99 that subscribers pay in the United States for Prime; the company charges similar fees abroad. Prime members also buy more goods from Amazon than non-members, Bezos has said, further boosting profit.

Of course, the numbers don’t always work out so nicely. And in those cases, Amazon is showing discipline:

Similarly, “Good Girls Revolt,” a critically-acclaimed show about gender inequality in a New York newsroom, had total U.S. viewership of 1.6 million but cost $81 million, with only 52,000 first streams worldwide by Prime members.

The program’s cost per new customer was about $1560, according to the documents. Amazon canceled it after one season.

To old school Hollywood folks, this may sound sad or worse, blasphemous. Amazon killed a show — a well-regarded one, no less — because it didn’t bolster Prime subscriptions. But the reality is that this is no different than Hollywood cancelling other quality content that doesn’t perform. Amazon is simply using more indirect measurements for such things.

Which gets to the heart of the matter: while what Amazon and the like are doing isn’t exactly content marketing, it is content as a marketing expense. Again, that sounds icky. But for those of us watching some of this content, it’s not, because a lot of the content is actually amazing. Which is itself sort of amazing when you stop to think about it.

Amazon and the like haven’t just changed the game, they’ve created an entirely different game. And we’re all playing ball.

The creatives don’t care who is paying the bills as long as they deliver an audience — which, of course, the tech giants can in spades. And beyond the ultimate life or death of a show, the new benefactors provide something almost as good as money: autonomy. Because unlike the titans of yore, they’re smart enough to know what they don’t know. And to get out of the way.

Still, many people have and will argue that this is all a bad thing. Because the content is being used to bolster the defenses of big tech. And big tech is using their bigness to bolster their defenses — see: the rapid rise of Apple Music. The powers that be in tech got sick of waiting to work with Hollywood. And now increasingly, they don’t have to.

The fear, of course, is that because none of this is the main business for these folks, they may cast it aside if and when times get tough. And that may very well be true. But it doesn’t change the reality that content, be it music or television or movies, is and will increasingly be a side hustle for big tech. A part of their bundle offering, as it were.

Again, this isn’t necessarily a good or bad thing. It is what it is. It’s just important to acknowledge and recognize what it is. As annoyed as Hollywood may be, it’s smart business. As Alex Taussig wrote in his newsletter recently:

Netflix and its streaming brethren are at greater production scale than the entire movie industry and are growing spend on content faster, funded by a more profitable business model. The writing may be on the wall for Hollywood.

It’s not just that Hollywood can’t compete on a dollar-for-dollar basis with big tech — though, as we’re seeing before our eyes, that is certainly part of it — it’s that Hollywood has been one of the most inefficiently run industries for decades at this point. Some of the lavish spending is to maintain the aspirational allure of Hollywood. But most of it is just decadent and wasteful.

As newfangled production companies such as Blumhouse are showing, there’s a lot of fat just dying to be trimmed in the industry, which can lead to insane profits. This may mean no more bowls of green M&Ms for stars and bowls of Fiji water for their dogs on set, but it means more money in the end. This is something the tech companies know a thing or two about. After all, who do you think is increasingly supplying said green M&Ms and Fiji waters?