Amazon Studios Will Be Making Oscar Contenders Soon

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Not everyone cheered when (AMZN) revealed its plans to make movies. Why? Some fear that films are too risky an investment compared to episodic programming.

There's certainly logic in that. Netflix's (NFLX) initial $100 million bet on "House of Cards" bought two seasons and 26 episodes. A $100 million movie would buy 90 to 120 minutes of something that offers zero guarantee of box office success. Nevertheless, my study of cinema's most acclaimed films says Amazon investors have a lot less to fear than the skeptics might think.

What Amazon Is Really Doing

Before we get to the numbers, let's review what we know about Amazon's plans. Studio executives aim to fund and bring to theaters 12 movies each year, putting the company on par with majors such as Disney (DIS), 21st Century Fox (FOXA), Paramount Pictures, Sony (SNE) and Time Warner (TWX), all of which distributed at least 13 movies last year. Features will stream on Amazon Prime within four to eight weeks of theatrical release.

Don't expect theater operators to like that model. Shared-revenue agreements tend to skew at least 90 percent of the gross in favor of film distributors through the first two weeks and 80 percent or more in the two weeks following. Cinemas that keep audiences coming in to see films weeks after release are more likely to produce sustainable profits. By taking its films out of the rotation early, Amazon could be cutting one of its key distribution partners off at the knees.

Why Amazon Can Break the Rules

Or not. Unlike studios, which depend on earning a return from the movies they make, Amazon is interested in driving audiences to its Prime service. The studio has leverage to offer better terms to theaters in exchange for showing its films early and often, making up the difference via new Prime members who sign up to see a buzzed-about movie they might have missed because of a short theater run.

Outgoing CFO Tom Szkutak hinted at Prime's draw for entertainment consumers during last month's fourth-quarter earnings call. Specifically, he said that Prime customers who arrive through a video free trial renew at higher rates than other members. They also tend to purchase more.

Worldwide, Amazon's paid Prime membership grew 53 percent year over year in Q4. That's a fast-growing, captive audience for original content. And yet the e-tailer doesn't necessarily need a fattening Prime membership to cash in on in-house movies. Blu-ray and DVD distribution are already in the works for original series "Transparent" and "Bosch," Variety reported last year. Movies would be no different, and you can bet that Amazon would take a markup on every disc sold.

The Financial Profile of an Oscar Contender

But that's the gravy. The steak in this deal is how Amazon plans to develop and distribute original movies. Reuters quotes spokeswoman Sally Fouts as saying that Amazon plans on spending $5 million to $25 million for original features, or about the same as what studios pay to make independent films that boast an Oscar pedigree.

Look at this year's nominees. Studios spent just over $20 million on average to produce the eight films up for Best Picture on Sunday night. All but one is profitable, and the highest margin producer -- "Boyhood," at 39.08 percent when you include home video sales -- also happens to sport the second-lowest production budget, at just $4 million. Amazon is aiming for that same sweet spot.

Don't be surprised if CEO Jeff Bezos and his team hit the mark after a few tries, striking Oscar gold in the process.

Motley Fool contributor Tim Beyers enjoys a good Oscar party as much as the next movie maven. Find him on Twitter as @milehighfool. Tim owned shares of Disney, Netflix, and Time Warner at the time of publication. The Motley Fool owned shares of and recommends Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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