sp16 sibc bain project final presentation

Spring 2016 Bain & Company Project

On Amazon’s Future Growth Potential

April 22nd, 2015

The Team

Ella Fennelly

Freshman

Business & Spanish

Chang Woo Jung

Sophomore

IT Management &

Chinese

Juan Pablo Borrero

Sophomore

Mathematics &

Actuarial Science

Jiayi Chen

Freshman

Accounting &

Economics

Laura Dillon

Sophomore

Mechanical

Engineering & ACMS

Jiale Hu

Freshman

Accounting & PoliSci

Dylan Naylor

Freshman

Accounting

Erica Siatczynski

Sophomore

IT Management

Gregory Trinkl

Sophomore

Accounting

2

3

Executive Summary

Client

•Amazon is the leading e-commerce and online auction service provider in the United States, currently adding various businesses in its portfolio to secure its future growth opportunities

Situation

•The company occupies several key businesses in a variety of industries including delivery service, web services, and media

•The company’s cost structure prevents Amazon from recovering its profit from variable expenses, raising a need for new revenue stream

Recommendation

•Amazon should enlarge its SVOD service with Prime Instant Video as a strategically aligned opportunity with high profit potential

•Amazon should do so by expanding within the Mexican market to maximize the synergy with its Prime membership model

4

Amazon Overview

Delivery

ServicesAmazon Web

ServicesAmazon Media

Global

ExpansionContent

Considerations / Final Recommendation

Amazon Instant Video

and the SVOD Industry

Amazon, Yahoo Finance, Morning Star, Forbes

Amazon is recognized as a leading e-commerce company

with high growth potential

Amazon Key People

5

ChallengesCore Competencies

Jeffrey

Bezos

Founder &

CEO

Brian

Olsavsky

CFO

Jeffrey

Blackburn

Senior VP

Diego

Piacentini

Senior VP

Amazon has a high growth potential due to its innovative leaders and strong industry presence.

Founded in 1994 E-commerce company

High growth potential

company

Sells wide range of

consumer products

Investment mode prevents high profits

Low Gross Margin

Expenses overly dependent on fuel prices

Variable Delivery Costs

Must determine next profit generation model

Need of New Growth Vehicle

Reputation and name

recognition

Online customer

experience

Wide variety of products

and services

Investing in innovative technology

Amazon, Statista

Amazon maintains overall healthy financials and

business models, while suffering from low margin rate

6

Amazon’s new investment should align with its core competencies and current business model and

seek to grow in gross margin.

Industry Peers

Current Business

Traditional e-commerce market

• Everyday consumer products

• Books

• Amazon Fresh (perishables)

• Amazon Pantry (non-perishables)

• Amazon Prime and Dash Delivery

Digital Media

• Prime Music Player

• Amazon Video and Cable Store

• Kindle e-reader and store

• Fire TV, tablets, and phone

• Amazon Echo

Other Ventures

• Brick and mortar book store

• Amazon cloud drive and web services

• Partnership with Comcast and

Playstation Vue

Key Financials

Market Cap $261.4 B

TTM

Revenue$107.01 B

TTM

EBITDA$7.88 B

TTM EV /

EBITDA29.72

Total Debt $17.55 B

EPS 1.25

P/E 444.18

Gross

Profit

35.36 B

Profit

Margin

0.56 %

Cash 19.81 B

0.00% 20.00% 40.00% 60.00% 80.00%

Amazon

Apple

Alibaba

Walmart

Target

Gross Margin (%)

Statista, Motley Fool, Amazon

Amazon’s growth rate has declined in recent years,

along with its lead over competitors

Situation

Analysis

7

Recommendation

An investment outside of the retail industry would create revenue growth for Amazon without a

dependency on its declining traditional e-commerce business.

• Amazon has grown at an high rate, but in

recent years, this rate has decreased

• Other companies have entered the e-

commerce market, closing the gap Amazon

had over competitors

• Amazon’s next investment should be

somewhere other than traditional e-

commerce business

26%

39%

29% 28%

40% 41%

27%22% 20% 20%

0%

10%

20%

30%

40%

50%

2006 2008 2010 2012 2014

Year Over Year Revenue Growth

0%

20%

40%

60%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Amazon vs. U.S E-Commerce Growth Rate

U.S. E-Commerce Growth

Amazon E-Commerce Growth

Non-retailLow

variable costs

Immediate revenue boost

8IBIS World

The new investment strategy should concentrate more

on the revenue growth rather than cost-saving measures

3.4

8.9

71.4

0.8 1.64.6

9.3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cost Structure of e-Commerce Industry

Other

Rent &Utilities

Marketing

Depreciation

Purchases

Wages

RemainingProfit

•Amazon is basically an online auction, thus little saving opportunity in purchases

•Amazon’s need for quick delivery (Pantry/ Fresh/Dash) requires high rent and utilities and shipping fees

•Local service centers and warehousesincrease annual depreciation

Weak Pursuits for Amazon

•Should sell products that require minimal…

-Delivery cost

-Physical facilities

-Additional marketing

• New growth driver should retain high contribution margin by minimalizingvariable and fixed expenses

Strong Pursuits for Amazon

Amazon needs to create a new

revenue stream, which can leverage

profit generation.

9

Amazon Overview

Delivery

ServicesAmazon Web




Global

ExpansionContent


10The Wall Street Journal, The Seattle Times, IBIS World

Investment in delivery service will force Amazon to

compete without enough infrastructure

Expanding its own delivery service in the long run would reduce operational costs; however, Amazon is not posed to

compete with the highly efficient US postal systems that are highly capital intensive with their vast networks.

International Expansion InitiativesAmazon’s Lack of Resources

Amazon Delivery Service

Past acquisitions

• Colis Privé: French parcel delivery company. Purchased 25% stake, now buying the rest.• Yodal: United Kingdom parcel-delivery company. Acquired the right to purchase 4.2%•Currently, negotiating to lease 20 Boeing 767 cargo jets

Benefits

• Establish customer network

• Optimize logistics

• Reduce operational costs

•Tame delivery expenses and rates

•Avoid logistics and communication difficulties between Amazon and delivery companies

UPS Inc, FedEx Corp, and the U.S. Postal Service deliver

the majority of Amazon’s packages.

35%

30%

17%

18%

U.S. Postal Service

UPS

FedEx

Regional shippers

•FedEx plans to spend an additional $4.6 billion on their network

•FedEx spent $10.8 billion on operational activity last year

Capital Intensity

•The major delivery companies have years of expertise on route efficiencies that Amazon would have to build

Information Intensity

8%

10%

12%

14%

16%

20121Q

20122Q

20123Q

20124Q

20131Q

20132Q

20133Q

20134Q

20141Q

Ratio of Shipping Cost to Total Revenue

11

Investment in web services does not provide enough

room for revenue growth

Drawbacks of Investing in AWS

AWS In Pole Position of the Market

The Seattle Times; Forbes ; TechRepublic; TechCrunch; Federal Reserve Bank

Due to AWS’s currently strong position and the Business-to-Business focus of the cloud computing industry, immediate

revenue growth or cost reduction is not likely.

Amazon

Google App Engine

Microsoft Azure

Rackspace Cloud

3Tera

RightScale

Joyent

0% 20% 40% 60%

Cloud Computing Market Penetration

1. AWS already dominates the cloud computing industry.

2. Entrenched market.

3. Possibility of businesses developing their own cloud services.

4. Risk and uncertainty associated with the boom and bust nature of the technology industry.

5. Rising threat of cyber crime.

6. Increased regulation on the horizon.

Cloud Computing Industry: 3 Models

• Hosts applications for customers

Software As a Service

• Underlying framework for customers applications

Platform As Service

• Host third party hardware for client applications

Infrastructure as a Service

12Amazon

Amazon Prime’s diverse benefits can generate alternative

spending for various offerings through subscription

•On eligible items to addresses in the contiguous U.S. and other shipping benefits.

FREE Two-Day Shipping

•Unlimited streaming of movies and TV episodes.

Prime Video

•Unlimited, ad-free access to hundreds of Prime Playlists and more than a million songs.

Prime Music

•Secure unlimited photo storage in Amazon Cloud Drive.

Prime Photos

•Get 30-minute early access to Lightning Deals on Amazon.com and new events on MyHabit.com.

Prime Early Access

Prime Pantry

Prime Exclusive Savings in

Video Games

Kindle First

Kindle Owners' Lending Library

Membership Sharing

Amazon Prime Amazon Prime is a membership program that gives customers access to streaming video, music, e-books, free shipping and a variety of other Amazon-specific services and deals

Amazon, Consumer Report, Macworld

Access to thousands of popular movies and TV shows with no additional cost

Add-on subscriptions from SHOWTIME, STARZ, etc.

Multiple Streaming Media Devices: Smart TVs,Blu-ray players, Game consoles (PlayStation, Xbox, Wii), iOS devices, Android devices

Among many Prime offerings, instant video and music still have potential as future revenue streams

Amazon Prime Instant Video is comparably more promising than Prime Music in terms of future profit opportunities

considering competitors within the industry and growth potentials.

Amazon Prime Instant Video

Instant Video Competitor: Netflix

Amazon Prime Instant

VideoNetflix

Selection Almost 3,500More than 7,500 HD

videos

Extras

Original Shows/ editor

recommendations/ other

Prime benefits

Popular original series

Convenience

Netflix is more convenient:

More devices are Netflix-ready/

videos easier to stream for Netflix

Cost $99/year $108/year

Amazon Prime Music

•For members in the U.S. and Puerto Rico

Unlimited, ad-free access to hundreds of Prime Playlists and more than a million songs

•Fire phone/ tablets/ TV

•Amazon Echo

•iOS devices

•Android smartphones and tablets (v.4.0 and above)

•PC & Mac

•Amazon website

Multiple Compatible devices support Amazon Music Prime Music

Music Streaming Service Market Share

45%

17%

16%

13%

7%

5%

0% 10% 20% 30% 40% 50%

Pandora

iHeartRadio

iTunes Radio

Spotify

AmazonMusic

Rhapsody

13

14

Amazon should invest in their media segment in

consideration of growth potential and available resources

Delivery Service Amazon’s web services

Drawbacks

Media

Opportunities

US Postal Systems is highly capital

intensive

Major delivery companies have years

of expertise on route efficiencies that

Amazon would have to build

AWS already dominates the cloud

computing industry, which implies low

room for growth

Due to high competition and efficiency

within the market there are tight

profit margins

Risk and uncertainty associated with

the boom and bust nature of the

technology industry and rising threat

of cyber crime

Rapid change in market from online

downloads to online streaming with

potential opportunities and large profit

marginsEntrenched market

Increasing size of market, penetration

rate and connectivity around the world

Room for improvements within the

company

Established costumer network and low

barriers to expand

Delivery Services Web Services Media

Expertise

Room for growth

Competition

Resources and

costumer network

Verdict High competition and low

expertise. The market is highly

efficient and capital intensive.

Limited room for growth

Entrenched market with low room

for improvements and growth. Not

many additional opportunities

compared to other segments

Large established costumer

network and resources with

tremendous room for growth.

15

Amazon Overview

Delivery

ServicesAmazon Web


Global

ExpansionContent




The media and entertainment industry is expected to

keep growing at a steady pace over the next 5 years

PwC, Statistica

Key Trends

Internet penetration and connectivity

Technological improvements

Percentage of services conducted

online

Innovations and number of products

online

Growth drivers

Music

•11.2% CAGR to 2019 in digital music streaming

•Revenue by 2018: 1.78bn Streaming, 1.65bndownloading, 1.58bn physical

•Negative growth for digital downloads from 2.2bnin revenue in 2014 to 1.5bn in 2019

Video

•Electronic home video to overtake box office revenue by 2017

•Physical home video to decline -9.4% CAGR over the next 5 years

Television

•IPVT (Internet protocol television) to drive growth in the television segment.

•Penetration to rise from 9.8% of households in 2014 to 12.5% in 2019.

•Cable and satellite television are expected to decline.

The new entertainment and media landscape continues to change rapidly due to the increase of younger audiences

subscribing to digital platforms. Amazon’s expansion into online streaming will benefit from this steady growth.

16

0.

0.5

1.

1.5

2.

2.5

2015 2016 2017 2018 2019

Value of the global entertainment and media market from 2015 to 2019 (in trillion U.S.

dollars)

17Ooyala, American Bar, Morgan Stanley, Nielsen

Within the video media industry, Subscription Video on

Demand (SVOD) has exceptional market growth potential

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2011 2012 2013 2014 2015

A La Carte

MonthlySubscription

Purchase to Own

Industry Characteristics

Increasing Streaming Popularity

•High barriers to entry - high capital requirements, existing exclusive content rights, challenge of creating original content

•New entrants threaten substitution based on consumer price sensitivity

•Competition high with many players and similar content: 13 % of users use multiple streamers

•Original content is a key differentiator between services

Competitive Landscape

•45% of US households now use a SVOD service

•Live TV viewership has declined in the past 5 years by 1% YOY

•SVOD now accounts for 23% of total entertainment spending; 4x greater than spending in 2011

Rise of Subscription Video On Demand

Major Players

SVOD Market Breakdown

85%3%

10%2%

Netflix

Amazon

Hulu

Other

While there is a huge public attention on SVOD, current US market is saturated. Amazon should look for another place to grow.

18Morgan Stanley, PriceWaterHouseCoopers, Comscore, Netflix Annual Report

Increase in global internet access rates and number of TV

subscription suggests a bright future for SVOD market

0

20

40

60

80

100

2009 2010 2011 2012 2013 2014 2015*

Africa Arab States Asia Pacific CIS Europe The Americas

International Prospects for Growth

• Global OTT revenues to reach $42.24 billion in 2020, up from

$19.03 billion in 2014

• US share of global revenues in OTT space will decline from a

value of 59% in 2010 to 37% in 2020 as international companies

catch up

• China OTT will grow from $37 million in 2010 to $3.03 billion in

2020

• Top 10 fastest growing markets: 1. Argentina; 2. Canada; 3. Chile;

4. Turkey; 5. Russia; 6. Hong Kong; 7. Vietnam; 8. Brazil; 9.

France; 10. Spain

• Analysts suggests 30% annual growth in international spending on

online video—the fastest growing digital format0

100

200

300

400

500

600

700

800

2009 2010 2011 2012 2013 2014

Global Mobile TV Subscribers (millions)

Global Internet Penetration Rate (%)

CAGR: 63%

43.2 25.4 22.3 13.9 11 9 5.8 4.4 4 2.6

Netflix DirectTV Comcast Dish TimeWarner Cable Hulu Verizon Fios Charter Cox Cabelvision

0%

10%

20%

30%

40%

50%

2013 2014 2015

Rise in US Household SVOD Subscriptions

CAGR: 13.39%

The SVOD subscription base comprises of more than 60% of total subscriptions as consumers move away from CableTV

2015 US Subscribers (millions)

*Estimate

19FireOnlineVideo, Hollywood Branded Inc., StrategyAnalytics

In the SVOD market, Amazon faces great competition,

but has the potential for revenue growth

Strengths

•Established Prime users

•Offers more than streaming service: also rent/buy

Weaknesses• Limited global market

• APIV less frequently used by its users than Netflix (fewer marketing opportunities)

• Lack of response to its original content

Opportunities

•New “Streaming Partners Program”

• International Growth

•Occupies 38% of share of SVOD households in the US

Threats

•Competition (e.g. Netflix has better platform: its own CDN and technology for video delivery)

Amazon has had a firm step into the SVOD industry, while it still faces challenges from its major

competitors specifically in its production of original content and its global presence.

20

Amazon can grow its revenue most effectively by

increasing customer base and money spent per customer

Growth in Number of Customers

Reach more U.S. Customers

Stagnant market

Global Expansion

Room for growth

Successful Amazon launches recently

Growth in Money Spent per Customer

Amazon Prime Membership

Price

Subscription cost is set

Alternative Spending

Due to Prime membership and benefits

Premium Subscriptions

Add-ons for premium

channels at an additional cost

Revenue Growth Strategies for SVOD

Amazon’s weak presence outside of the U.S. and ability to leverage Prime benefits suggests an

expansion of Amazon’s Prime Instant Video as the most feasible growth path.

21

Amazon Overview

Delivery

ServicesAmazon Web


Global

ExpansionContent




22Statista, Amazon, Netflix, Hulu

Globally, SVOD industry is showing very rapid growth rate

• Netflix streams in over 190 countries

• Hulu only streams in USA and Japan

• Amazon Video streams in the United

States, United Kingdom, Japan, Austria,

and Germany

• Other global competitors include Televisa,

BigFlix, Hooq, Bell Media, and Clarovideo0

5

10

15

20

25

30

2014 2015 2016 2017 2018 2019 2020U.S. & Canada Latin America Africa & Middle East

Europe Asia Austalia

54%

5%

2%

24%

14%

1%

Total: 10.61 B USD

U.S. & Canada Latin AmericaAfrica & Middle East EuropeAsia Australia

0

50

100

2015 2016 2017 2018 2019 2020Global U.S. & CanadaLatin America Africa & Middle EastEurope AsiaAustralia

Total Revenue Breakdown

Anticipated Penetration Rate (%)

Anticipated Revenue Growth Rate (%)

Additional Factors

Among many international markets, Latin America

demonstrates good rationale for future investment

SVOD WorldwideNorth

America

Latin

America

Africa and

Middle EastEurope Asia

Revenue (mUSD) 10611.8 5767 474 171 2582 1492

CAGR (2016-2020) 11.65 9 20.87 20.45 12.43 15.44

Penetration growth 4.55 - 6.06 24.52 - 30 6.97-9.43 3.31-5.34 6.8-9.63 1.64-2.3

ARPU (USD) 59.64 80.64 24 42 69 35

Verdict High

volume, but

low market

growth.

High

competition

Decent market

volume;

however,

tremendous

growth with an

increasing

penetration

rate

Low volume

and high

growth.

Penetration

rate is low due

to limited

resources

High volume

and decent

growth, but

saturated with

fairly big

players

High volume

and decent

growth, but

limited

resources that

entails low

penetration

rate

• Both North America and Europe have high volume and decent growth; however, competition is high

and the markets are saturated by large players, which makes Amazon’s profit margin tighter.

• Asia, Africa and Middle East have high growth rates, but low penetration rates and penetration

growth, which entail difficulties on expanding the services.

• In Latin America there is high growth rate and decent penetration rate, which makes the market

reliable and profitable, a good scenario for Amazon to be the leading SVoD company

23

24Statista

Market breakdown of the SVOD market in Latin America shows

positive growth rates and increasing penetration rates

• Latin America displays a positive growth

rate relative to other international

markets

• However, the political climate of Brazil

and Argentina would not allow for an

effective expansion into the SVOD market

• Mexico had the largest international

Amazon launch

Anticipated Revenue Growth Rate

Anticipated Penetration Rate (%) Deciding Factors

3.4

5.57 7.7 8.3

8.9 9.4

02468

101214

2014 2015 2016 2017 2018 2019 2020

Argentina Brazil Mexico Latin America

19%

32%

49%

Total: 474.1 mUSD

Argentina Mexico Brazil

Total Revenue Breakdown

0

20

40

60

80

100

2015 2016 2017 2018 2019 2020

Argentina Brazil Mexico

Amazon, Bloomberg, Statista, Ooyala

Mexican market is emerging as the right place to

promote Prime SVOD subscription service

Netflix and Other Competitors

25

Amazon’s recent launch in Mexico provides an opportunity to expand its SVOD services into Latin America.

While the growth rate is expected to decrease (as it is across all regions), revenue is increasing and there are

currently few competitors

• Netflix’s market share has slipped from 64% to

56% in recent months

• Netflix offers 2,838 titles in Mexico,

compared to 7,202 in the United States.

• Clarovideo’s market share has increased from

32% to 40% since launching original content

Amazon Mexico SVOD in Mexico

Launched in June 2015 without Prime services

More product categories offered at debut than any other international launch

Offers free shipping on purchases of 599 pesos, about $38

Lacks access to U.S. offerings like Instant Video and Kindle Lending Library

88.682.1

2513.9 15.7 16.1

0

20

40

60

80

100

2015 2016 2017 2018 2019 2020

Revenue Growth Rate (%)

43.682.3

149.9187.3

213.5246.9

286.7

0

50

100

150

200

250

300

350

2014 2015 2016 2017 2018 2019 2020

Total Revenue (mUSD)

Amazon Overview

Delivery

ServicesAmazon Web


Global

ExpansionContent


26



27Business Insider

SVOD content can be purchased or produced

independently

Option 1. Purchasing Content Rights

• Original strategy for SVOD services

• Purchase rights to known content

• Different contracts for different regions

Creating Original Content

Purchasing Content Rights

Amazon’s Current Spending

Option 2. Creating Original Content

• New strategy for SVOD services

• Skip the middle man and develop original

content

• Create it or hire a production company

Amazon currently spends much more on purchasing content rights than creating their own content

through Amazon Studio.

28Business Insider, Netflix, Vulture

Purchasing content rights can be expensive but

dependable for Amazon in the saturated SVOD market

-

500

1,000

1,500

2,000

Q1'13

Q2'13

Q3'13

Q4'13

Q1'14

Q2'14

Q3'14

Q4'14

Q1'15

Q2'15

Q3'15

Q4'15

Netflix Licensing Costs (in Millions)

Add-On Subscriptions

• Launched in Spring 2015

• Prime members can subscribe to premium

content

• Premium channels still receive revenue

• Allows Amazon to stream content without

paying full price

• HBO deal likely over $100 million

Despite Netflix’s ability to spend large amounts on content, Amazon has stepped ahead of Netflix

through partnerships with premium channels. The purchase of content ensures customer access to

popular shows and helps build customer base.

Amazon needs more content

Premium channels need

more viewers

Amazon’s Content Rights

• Spent just under $3 billion purchasing

rights in 2015

• Successful in expanding content variety in

U.S.

• Costs will rise as Prime Video seeks to grow

and expand

29Business Insider, Amazon, Market Realist, Vulture

Although creating content might be advantageous in the long

run, it requires a larger investment in time and infrastructure

Amazon Studios

• Responsible for hits like The Man in the

High Castle

• No more than $320 million spent on original

content in 2015

• Production method allows for efficient use

of money

• Currently only allows English script

submissions

Netflix’s Produced Content

0

10

20

30

40

2012 2013 2014 2015

Amazon Netflix HBO FX

Major Players’ Original Shows

• Goal to have a new show every two and a

half weeks

• Seeks to increase current spending of 10%

of budget on original content to 50%

• Produced by outside studios

Amazon has a small but viable domestic presence in producing its own content, but needs to expand

its efforts to overtake Netflix, particularly in the global realm.

•Desires new content

•Allows anyone to submit a script

•Uses members to determine good pilots

30

For quick and successful establishment in the Mexican

market, Amazon should purchase content rights

• Immediate access to the market

• Use of established shows

• Little infrastructure needed

• Keep ownership of shows

• Cheaper entry into foreign countries in the long run

• Prevent other companies from using shows

• Costly in the long run

• New contracts for each region

• Expensive to bring U.S. content abroad

• Need to venture into creation market

• Large investment of time and human resources

• Shows may not succeed

• Possibility of too many shows

Purchasing Content Rights Producing Original Content

Pros

Cons

31

Amazon Overview

Delivery

ServicesAmazon Web


Global

ExpansionContent




IndexMundi; Geo-Mexico; Vulture; Amazon

Amazon should take time to deal with cultural barriers

in Mexico before providing local services

Likes/Dislikes

32

The cultural barriers which Amazon faces can be overcome through actions such as providing subtitles and purchasing

Mexican show television rights yet also through externals factors such as increased internet use and the Westernization

of Mexican culture.

Language Internet Use Penetration in Mexico

• 92.7% of Mexico’s inhabitants speak Spanish

only.

• Amazon Prime offers limited options for

subtitles(mostly in English) and does not

stream in different languages.

• However, this offers room for expansion:

subtitles and also purchasing of television

rights to Mexican shows. 0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2009 2010 2011 2012 2013 2014 2015

• Internet access is vital for SVOD

• While 93% have televisions, 51.1% of

Mexicans use the internet and this is rising.

• Huge regional disparity of internet access

• Regions like Chiapas, Oaxaca, Guerrero

and Tlaxcala have very limited access to

internet with practically no household

access.

• Huge importance placed on family-

Mexicans are potentially less likely to buy

into SVOD fad as Americans/British.

• Nonetheless, Mexicans are fans of popular

American shows that Amazon provides

such as Criminal Minds & SpongeBob.

• Mexico City, Queretaro, and Monterrey

are becoming Americanized- vast numbers

of Americans settling in these areas post

retirement.

33Ooyala, Mexican Law Blog, Mexico News Daily

Mexican government opened up its SVOD market, positioning

Mexico as one of the most digitalized countries by 2024

Regulations

• Deregulation bill passed in 2013

• Created a new communications and media regulator, Federal Communications Institute (IFT)

• Allows foreign owners to have a 49% stake in broadcasting companies and up to 100% ownership in for telecoms

• In 2015 IFT established that SVOD is not a substitute to paid TV so antitrust proceedings do not apply for the SVOD market

• This resolution is a space of freedom that SVOD companies can enjoy to grow

Trends

In May 2013 Mexico ranked high in its “OTT Video Market Attractiveness Index”

Robust and burgeoning digital video market. CAGR exceeding 33% through 2018. Subscription video on demand will drive much of the market’s growth

In 2014 Mexico’s government purchased and planned to distribute more than 120,000 digital TVs

15 million households are expected to add digital TVs by 2020

Highlights

• In January 2016, the Mexican government took a

major step inviting to bid on a wholesale mobile

network.

• The intention is to provide high-speed, broadband

Internet access through a shared 4G mobile network

to at least 85% of the country’s population

• The government’s goal is to position Mexico as one of

the 15 most digitized countries by 2024

34

Amazon’s advance into the Mexico market should be a

clear-paced, effectively regulated process

Launch Amazon Prime

•Limited to Amazon Instant Video, Prime Photo storage, Prime Early Access

•No Free Two-Day Shipping to avoid logistical issues and costs

Release of Purchased Content

• Including popular U.S. and Mexican shows

•Some U.S. shows will include subtitles

•Will be an ongoing release

•Potentially movies as well

Extension of Amazon Studio

•Produce Mexican/Latin American content

•Allow Spanish scripts to be sent in

•Hire producers, etc. who are knowledgeable about the Mexican Media Industry

1. Accurate investigation of market drivers: when related new technology (e.g.

government-mandated 4G coverage) will be implemented and how well-informed

and receptive the public is to these technology updates

2. Regulation of implementation timeline to ensure continuous interest by Prime

members

3. Consistent release of new shows and movies

4. Creation of a Mexican-knowledgeable team of marketers and producers

Strategies for Successful Implementation

35Amazon, Internet Live Stats

Contribution Margin Analysis of Mexico Expansion w/

Prime Video presents positive contribution margin of

$600M and positive IRR

Scenario 1. Amazon stays in Mexican

market w/o Prime & media products Annual CM: 17.4m * $64 = $1.1B

Annual Contribution Margin / member Prime Video Non-Prime

Annual Prime Member Spend (stats from 2014) $1500 * 60% = $900 $650~660 * 60% = $400

* Contribution Margin 12.0% 16.0%

= Per Member Contribution $108 $64

+ Prime Annual Fee (only counts ordinary, no student fee) $5 monthly fee * 12 = $60 -

= Annual Contribution Margin $168 $64

Annual Value of Prime Video member compared to non-Prime member in Mexico

Scenario 2. Amazon runs Prime in Mexican

market Annual Contribution Margin:

(12.2m * $64) + (5.2m * $168) = $1.7B

Simple comparison shows positive contribution margin of $600m per year

IRR Analysis

-Scenario 1. Amazon stays in Mexican market w/o Prime & media products

-Scenario 2. Amazon runs Prime with media contents in Mexican market

Year 0 1 2 3 4 5

Cash (5.50B) 1.1B 1.21B 1.33B 1.46B 1.61B

IRR 6.60%

Year 0 1 2 3 4 5

Cash (10.2B) 1.7B 2.21B 2.87B 3.73B 4.86B

IRR 12.84%

Task: Develop a new growth driver for Amazon in light

of its difficulty in recovering profit due to its cost

structure

Given these findings and taking into account Amazon’s current investment

opportunities and management objectives with Prime subscription model, we

believe implementing Amazon Prime Instant Video in Mexico presents high

upside potential and makes long-term strategic sense

Ultimately

Strategic Rationale

Feasibility and Execution

Little chance of cost saving, need for new revenue stream

Continuing market growth of SVOD industry worldwide

High growth rate of 88.6% in Mexican SVOD market and Amazon’s market

competitiveness show compelling profit potential

Purchase of content rights is better for quick and effective market entry

Financial analysis shows $600m contribution per year and a 12.84% return

Gradual expansion of Prime subscription is required in response to cultural

& regulative barriers and execution risk

Spanish subtitles, Mexican TV shows, future original content, focus on

large and Americanized cities

36

38

Appendix: Financial Calculations

A. Simple comparison assuming Amazon penetrates Mexican market

- Benchmarking U.S market:

-Total Americans w/ Internet: 270m

-Total U.S Amazon Users: 120m, thus 120m / 270m = 44% of Americans w/ Internet will

use Amazon

-Total Prime membership: 54m, thus 54m / 120m = 45% of Amazon members use Prime

- Applying to Mexican market, assuming both countries have same demographic structure:

-*Dollar figures are decreased by 40% from U.S. values for cost of living adjustment

-Total Mexican Population w/ Internet Access: 58m, % of Mexicans w/ access who use

Amazon= 44%

-Total potential Amazon users: 58m * 30% (estimating 14% less than U.S.) = 17.4m

-Total potential Prime membership: 17.4m * 30% = 5.2m

B. IRR Analysis

-Assumptions

-Year to year avg. revenue growth rate: 10% (w/o Prime) / 30% (w/ Prime)

-Revenue growth rate takes account of the growth of user #

-Pricing model remains same ($60 for annual subscription of Prime in Mexico)

-Current annual CM (w/o Prime) = 17.4m * $64 = $1.1B

-Current annual CM (w/ Prime) = (12.2m * $64) + (5.2m * $168) = $1.7B

-Initial Investments: Scenario 1: $1.1B * 500%= $5.5B, Scenario 2: $1.7B * 600%= 10.2B

-estimated numbers come from e-commerce cost structure

sp16 sibc bain project final presentation

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