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Amazon Has Bad News for Cord-Cutters

Jamal Carnette, CFA, The Motley Fool

If there's one business strategy that defines Amazon.com (NASDAQ: AMZN), it's the company's well-known penchant to sacrifice profit in the relentless pursuit of market share. CEO Jeff Bezos has become the second-richest person in the world thanks to his approach distilled in the simple epigram, "Your margin is my opportunity." 

As the joke goes, Amazon will eat the world by leveraging its low-margin, high-volume approach to dominate new markets and industries. Well, there appears to be one thing Amazon cannot disrupt: traditional subscription-based television. A report from Reuters found the company has scrapped plans to launch an online subscription-TV service because "it believes it cannot make enough money on such a service."

A pair of scissors cutting a cable cord.

Image source: Getty Images.

A nearly impossible task

It was always going to be difficult to bring a streaming-based service to market. The broad objectives of a successful offering all conflict with each other. A company must:

  • Carry a robust channel offering
  • Provide value by offering the service at the right price point
  • Obtain buy-in from programmers
  • Make a profit on the service

If Amazon, the company least concerned with operating margins, determined it was unable to provide a subscription-based service at a high enough margin to fit its company profile, then cord-cutters hoping for a comprehensive solution from big tech that will disrupt traditional cable television might be disappointed.

Amazon and Apple have tried and failed

For years it was rumored that Apple wanted to develop an online television service. In early 2015, it appeared Apple's plans to reinvent subscription-based television had finally materialized when The Wall Street Journal reported Cupertino was in talks to offer a skinny bundle of TV networks in the fall.

However, later reports revealed the company had issues with large content provider The Walt Disney Company about the number of Disney-owned channels the new service would carry. As the owner of ABC, all ESPN properties, A&E, and the Disney channels, the House of Mouse carries considerable weight among program providers.

It appears Apple is no longer trying to assemble a large-scale bundled-video service, instead opting to make a TV app to improve the experience of viewing content purchased from the iTunes store or third-party content from apps. Additionally, Apple has waded into producing original content, albeit slowly, by announcing a scripted television show with Dr. Dre and recently by snapping up a TV series from Reese Witherspoon and Jennifer Aniston. And while Apple is reported to have plans to spend $1 billion on original content in 2018, it appears far removed from its original goal of offering a streaming cable-TV substitute.

Alphabet has a solution, but does it have subscribers?

There is a member of big tech that does have a streaming-based cable television service: Alphabet, with its YouTube TV offering. For $35 a month, YouTube TV boasts more than 50 channels including broadcast networks and Disney's ESPN. While the service arrived to much fanfare in March, management has since been tight-lipped about the subscriber numbers. In a research note from KeyBank Capital last month, analyst Andy Hargreaves estimates the service has 200,000 subscribers (only a fraction of Dish Network's SlingTV subscribers), is not profitable, and will not be anytime soon. While it's anybody's guess as to the actual number of subscribers, Amazon's admission supports Hargreaves' thesis YouTube TV is unprofitable.

Unfortunately, it appears cord-cutters should face the fact that comprehensive solutions to replace cable television will most likely come from the cable providers themselves -- like Dish Network's SlingTV and AT&T's DIRECTV Now – or from the content providers, and it's unlikely they'll make these offerings good enough to steal market share from higher-margin traditional cable packages. In the intermediate future, cutting the cord will continue to have considerable trade-offs.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA owns shares of Alphabet (C shares), Apple, and AT&T.; The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Apple, and Walt Disney. The Motley Fool has a disclosure policy.