AMZN Stock – Here’s Why Amazon Prime Video Should Die

Amazon (AMZN) shares have been under pressure in 2014, with AMZN stock down about 20% year-to-date vs. a gain of about 6% for the S&P 500.

amzn stock logo primeThe reason for all the downward pressure on Amazon stock is a focus on margins and profits, with AMZN stock holders no longer patient with the e-commerce giant’s plan of building its scale at the the expense of the bottom line.

Recent boondoggles at Amazon include the Fire Phone — a big flop that is a long way from catching on with consumers, and a long way from driving any real profits considering the dominance of Apple (AAPL) and Samsung (SSNLF) in the space. Amazon Fire Phone sales have been abysmal, according to reports, and AMZN has slashed the price to a mere 99 cents thanks to miserable initial sales.

The Fire Phone itself will be forgettable, just the like Fire TV set-top box that also hasn’t been much of a success with consumers.

But it’s not just hardware that’s a liability for Amazon stock right now… the much-hyped Prime subscription service has a big anchor attached to it in the form of streaming video, and AMZN stock investors should be pushing the corporation to kill the service ASAP.

Amazon Prime Video an Afterthought

amazon stock amznFull disclosure: I am an Amazon Prime customer, and am currently binge-watching The Sopranos. But I also am a Netflix (NFLX) customer, and have always thought the selection on Netflix is better, the original programming offerings including Orange is the New Black or House of Cards are well done, and most importantly, I never get lag — even during peak hours.

I can’t say the same for AMZN and Prime.

But beyond one whiny consumer, it’s worth noting that from an investment perspective, there isn’t a lot to be gained from the massive server space and pricey content deals associated with Prime Instant Video.

In a new research note entitled, “Amazon: Is Prime Instant Video a Total Waste of Money?”, Bernstein Research analysts Carlos Kirjner and Peter Paskhaver point to costs “depressing (Amazon’s) margins and hiding the profitability of its core business,” and a survey of 1,000 consumers that shows a mere 13% consider video the most important reason for subscribing to Amazon Prime.

Remember, the AMZN subscription service gets its roots in expedited shipping and other perks for “power shoppers” on Amazon.com. That’s the core business here, and Prime does a great job supporting it the same way Costco (COST) members support the discount warehouse’s business.

But video? The connection is unclear.

The pair of Bernstein researchers note that AMZN stock could take a hit of up to $2 billion on content licenses this year thanks to the programming on Prime, money that could obviously be used to sate investor appetites for real profits on the business.

Now, Amazon will posit that Prime Instant Video is a value-add that keeps members happy and helps convert those who sign up for free trials. Like upholstery in a car, it’s not the core reason you buy — but it is indeed a factor when push comes to shove.

Still, it’s worth noting Kirjner and Paskhaver’s estimate that Amazon needs another 10 million to 20 million subscribers simply to run at break-even for Prime considering the content fees and other costs associated with the program.

If AMZN stock is truly going to focus on profits, perhaps it should focus on this costly video service that customers seem to think of as an afterthought.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP


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