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Business News/ Opinion / Columns/  Walmart, Netflix and Spotify are placed well for triple-win merger

Walmart, Netflix and Spotify are placed well for triple-win merger

The retailer could take on Amazon Prime by bundling content while the other two gain heft as well

Amazon Founder and CEO Jeff Bezos and Lauren Sanchez pose on the red carpet upon arrival to attend the Global Premiere of ‘The Lord of the Rings: The Rings of Power’ at the Odeon cinema in Leicester Square, central London (Photo: AFP)Premium
Amazon Founder and CEO Jeff Bezos and Lauren Sanchez pose on the red carpet upon arrival to attend the Global Premiere of ‘The Lord of the Rings: The Rings of Power’ at the Odeon cinema in Leicester Square, central London (Photo: AFP)

If you happened to log on to Amazon India’s app in the first week of September, chances are you would have seen an advertisement for The Rings of Power, a fantasy TV series based on J.R.R. Tolkien’s novel The Lord of the Rings and its appendices. In an April 2021 news report, The Hollywood Reporter had said that The Rings of Power will be the largest TV series ever made, with Amazon spending $465 million just on the first season.

So, why is Amazon producing a serial and spending so much money on it? The answer lies in the business model that is now at the heart of Amazon and other companies looking to turn into even bigger technology behemoths.

In order to watch The Rings of Power, one needs to have access to Amazon Prime. An annual subscription costs 1,499 in India and $139 in the US. Along with being able to watch movies and TV serials, subscribers of Amazon Prime are entitled to free shipping when they buy something directly from Amazon or from a third-party listed on it, with the order being fulfilled by Amazon. One also has access to Amazon Music, Kindle Books and early access to select lightning deals.

The moot point here is that Amazon Prime is a very powerful marketing tool. In her book Direct: The Rise of the Middleman Economy and the Power of Going to Source, Kathryn Judge cites a 2019 survey, as per which 62% of American households are members of Amazon Prime and on an average spend $1,400 annually on buying goods and services from Amazon, which is twice the average amount spent by non-Prime shoppers.

What’s happening here? As Judge writes: “A consumer may join Prime just for the free movies… Once that commitment is made, however, the consumer can enjoy delivery that is not only incredibly fast but seemingly free on everything labelled ‘Prime’. This makes it that much more costly for a consumer to choose to go anywhere else." The marginal cost, every time an Amazon Prime member buys a product, watches a serial or even listens to a song, is zero. This gets the consumer hooked on to Amazon.

Also, with free delivery on everything labelled Prime, customers don’t like to buy goods from third-party sellers selling on Amazon who charge for delivery. Third-party sellers can get around this problem by paying Amazon a fee to get listed under Prime and become eligible for free shipping.

This helps Amazon in two ways. The company makes some money from the listing-fee paid by third-party sellers. But more importantly, the network effect of the business model gets stronger. As Judge writes: “More items shipped free and fast because they’re labelled ‘Prime’ leads more people to become Prime members, which in turn entices yet more third-party sellers to choose Amazon distribution." And so the cycle works, in the process making Amazon bigger and more powerful.

Scott Galloway, an American professor of marketing, calls this subscription-based business model a ‘rundle’, which is short for a recurring revenue bundle. Amazon is not the only company going down this route. Apple, which primarily makes phones and computers, has also got into the streaming business with Apple TV+, is producing a host of video content, and is trying to keep its existing users in the overall Apple ecosystem. Over a period of time, as Galloway puts it, “Apple is also in a position to offer a Prime-like rundle." It can offer games, apps, new phones, new products, etc, for a certain monthly fee.

These rundles are breaking down business models and challenging the existing way of doing things. Take Walmart. The success of Amazon Prime clearly worries it and probably pushed the mega-retailer to get into a deal with the streaming service Paramount +.

As a part of this deal, members of Walmart +, the retailer’s answer to Amazon Prime, will get access to content on Paramount +. In addition, being a member of Walmart + already allows members free delivery from the store as well as free shipping of online orders and a lower price while buying fuel. Other than Walmart, entertainment giant Disney is looking at rundles. As The Economist recently put it: “Some wonder if entry to its parks could one day form part of a Disney mega-bundle."

Finally, where does all this leave pure play content companies like Netflix, which offers video content, and Spotify, which is into music and other audio content? They clearly do not have the deep pockets of the larger companies they are competing with. For starters, as Galloway puts it, it makes sense for Netflix and Spotify to merge.

The trouble is that this might not be enough for their long-term survival. In August, the streaming service Disney+ along with ESPN+ and Hulu overtook Netflix, when it comes to total number of subscribers. Both ESPN and Hulu are majorly owned by Disney. Disney expects Disney+ to overtake Netflix on its own by 2024.

It might just make more sense for the combined entity of Netflix and Spotify to be bought by Walmart, which clearly needs to plug the video content gap in its rundle. While the deal with Paramount+ might work for the time being, it may simply not be enough in the long-term if Walmart seriously wants to take on Amazon in the digital domain.

Vivek Kaul is the author of ‘Bad Money’.

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Updated: 13 Sep 2022, 09:46 PM IST
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