Wait, Wasn't Streaming Video the Way Amazon Was Supposed to be Make Money off the Kindle?
Netflix CEO Reid Hastings says that Amazon loses between $500 million and $1 billion a year on streaming video, which, if true, doesn't quite make sense given Amazon's stated business strategy for getting into the tablet and content business. Hasting based this estimate on the value of the content deals that the two companies competed over, he told AllThingsD's Peter Kafka, and his knowledge of the prices he's paying for streaming rights. (Netflix spends about $2 billion a year for the content it offers.) As someone who runs a company in direct competition with Amazon and who has a vested interest in looking more successful than Amazon, Hastings is both a great expert and the worst source on the economics of Amazon's video streaming offerings. But Amazon didn't make the case for itself in its comment to Kafka, either, choosing to lean into the we're-losing-a-boatload-on-video that Hastings suggests: "We don’t comment on our individual investments but it’s correct that Prime Instant Video is an amazing value for customers," a spokesperson said.
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This nugget comes as a bit shocking because CEO Jeff Bezos has said before that the company plans on make up for the loss it takes for selling the Kindle Fire at $299 by selling the content — including ebooks, streaming video, music, games, and apps — to tablet owners. Tablets = razors and content = razor blades, so to speak. But people who speculate on these things have already ruled out much of that content as big money-makers. Citi analyst Mark Mahaney explained that Amazon didn't have a lot of money to be made selling books and music. Cross off video from the content list and you're left with games and apps as the veins of revenue that will keep the whole Kindle Fire business going, which means selling a whole lotta Angry Birds.
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Still, it's early days in the business, and perhaps the losses from video are only short-term, as Bezos builds customer loyalty even while paying through the nose for the stuff that makes customers loyal. Bezos has talked about this strategy before: "In my view, you set up the business in a way that is aligned with the customer, or you can set it up in odds with the customer. When you have the option, you should figure out a way to be in alignment. Sometimes that requires you to be more patient, so it’s part and parcel with long-term thinking," he said in an interview with AllThingsD's Tricia Duyree. For that to pan out, however, people need to get hooked to the Kindle and its eco-system. As cagey as Amazon is about sales, the company hasn't indicated that has happened yet, claiming the Kindle Fire makes up 22 percent of tablet sales in the US, which Business Insider's Alex Cocatas estimates is somewhere between 4 and 6 million tablets. For comparison Apple had sold 100 million iPads as of October 2012.
