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Amazon's growth under Andy Jassy allows for 'more engagement in M&A': Analyst

D.A. Davidson Managing Director Tom Forte breaks down the figures reported from Amazon's Thursday Night Football stream, Amazon Prime's expansion, and comparisons to Apple.

Video Transcript

[AUDIO LOGO]

SEANA SMITH: Early reaction from Amazon's first "Thursday Night Football" trickling out here. The company's head of sports calling the premier a, quote, "resounding success." In an internal email, he wrote that the company saw more Prime signups during the three-hour window than ever before, including Prime Day, Cyber Monday, and Black Friday.

Joining us now is Tom Forte. He's a Senior Research Analyst with DA Davidson Tom, it's great to see you. You, obviously, cover Amazon stock. It looks like it was a huge win for the company, the most Prime subscriber memberships in a three-hour window, so very, very important to point out that tidbit of information. But what's your assessment just of what we're hearing from their head of sports?

TOM FORTE: Sure. So, basically, the way that I've been thinking about "Thursday Night Football" and "Lord of the Rings," the two multibillion dollar Prime Video bets, is how about the subscribers who are not interested in "Thursday Tonight Football?" So if you look at the ratings for "Thursday Night Football" last year, let's say that 15 million people watched Amazon "Thursday Night Football." On a base of 200 million Prime Video members, that's 7 and 1/2% penetration.

That means 92.5% of Amazon Prime viewers didn't watch "Thursday Tonight Football." Well, in the 92.5%, how are they going to feel about paying $20 more a year for Prime for something they're not interested in? So I think that's kind of the challenge for Amazon when you think about "Thursday Night Football" and spending $1 billion a year for the rights to broadcast it.

DAVID BRIGGS: How much do you-- it's bizarre that we have not, Tom, heard a total rating or how many millions of people did watch the game. Amazon has more data than anybody on the planet, presumably could have had it that night. What do you make of that? Is there a number that could disappoint the Street-- the Street?

TOM FORTE: It's an excellent question. And you're talking to someone who's followed Amazon essentially since the beginning when they were only an online bookstore. And I'm used to Amazon being vague with data. So a lot of times, for example, they'll say that they have more than 200 million Prime members who watch Video or more than a million Amazon Web Services customers, things of that nature.

So, unfortunately, it's not unusual for Amazon not to give specific data, in this case, audience size for "Thursday Night Football." So I go back to the information from deadline on last year's ratings, which I think indicated it was in the neighborhood of, call it, 15 million. And I think that's a good guidepost for how Amazon may have performed.

RACHELLE AKUFFO: So, Tom, I want to ask you about what you called Amazon's sphere of influence. How does sports and streaming then play into that?

TOM FORTE: So really, the question is, how does Prime Video play for Amazon? And I think the most optimistic or bullish you can get on Prime Video is to think about Amazon's advertising efforts. So while we talked about how they're sometimes not very clear with providing data, they started breaking out how much revenue they are generating from advertising.

So to the extent that they're broadcasting "Thursday Night Football" and showing a lot of ads against that popular content, I think that is actually a very good thing for Amazon. And the relative profitability of their advertising sales, it may not be as good as cloud computing, but it's definitely better than their retail sales. So I think the question will be, how much incremental advertising revenue can they generate from "Thursday Night Football," and the good news is it should be high-margin revenue like other advertising revenue Amazon's generating.

DAVID BRIGGS: Give it a year or two before they throw a barcode right up on your screen and you're shopping at halftime, maybe not even that long. But Apple's the other player in this game, expected to get the Sunday NFL Ticket package. How significant of the story is Apple's entry into sports streaming?

TOM FORTE: So, for Apple, they're primarily going to make money selling you the hardware. So I think a great opportunity for Apple is to mirror what the cable companies did, which is charge you a monthly bill that includes hardware, software, and services. So I think that's going to enable Apple to charge $2,000 for an iPhone instead of $1,000.

And the example I like to give is how many consumers know how much their Samsung Set-Top box costs? And the answer is probably none. So to the extent that Apple can convert it to a monthly bill, let's call it $100 a month or maybe $200 a month for all of the Apple hardware, software, and services you'd ever want, I think that's what's going to enable Apple to make money, though I still think it'd be hard for them to make money on Sunday NFL Ticket because it's such an expensive piece of content.

DAVID BRIGGS: Yeah, around $2 billion a year. That's really tough. Yeah.

SEANA SMITH: It's very expensive. And, Tom, talking about what all these tech giants are doing to stay competitive, it's not-- they're not just focusing on their content, on the streaming plays here. There's also other, obviously, very important parts of the business. When it comes to Amazon, it's interesting in terms of the M&A strategy that we have seen under new CEO Andy Jassy, most recently, one of their recent acquisitions was them buying iRobot. Now, there was news today that the FTC is requesting for additional information on this deal. What do you think the likelihood is of this deal getting approved and then, more broadly speaking, just Amazon's M&A strategy under Jassy?

TOM FORTE: So I think that there's a high likelihood the deal gets approved. The reason I think the deal gets approved is because I don't think Amazon entering robot vacuums, essentially, is going to create a non-competitive environment for everyone else. And I do think that if you look at this one, One Medical, even MGM, Amazon seems to be expressing a lot of confidence it can do M&A deals $10 billion and less.

And then how do I compare and contrast M&A under Andy versus M&A under Jeff? The big challenge for Andy is that it takes about $3.9 billion for 100 basis points of revenue growth for Amazon. It's just a much bigger company than when Jeff ran it.

So Andy needs to do more M&A. I love the One Medical deal. It's a trillion-dollar total addressable market being health care. That could be a needle mover. And I think that's why you're seeing Amazon engage in more M&A than it did than when Jeff Bezos ran the company.

RACHELLE AKUFFO: And, Tom, you also talk about some of the risks that perhaps aren't getting talked about as much when it comes to Amazon. What are you highlighting?

TOM FORTE: So, again, I've been highlighting this risk because a lot of industry executives in the video industry felt like there was zero risk to Amazon, meaning that consumers so loved their Prime that if they were disappointed by "Lord of the Rings" or they didn't want to pay the $20 for the NFL, they would never turn off their Prime membership. I do think that that's a risk for Amazon. I do think that charging more money for the service could turn off consumers, especially the small minority who don't like Tolkien or don't like the NFL. But I do think there's a risk there.

RACHELLE AKUFFO: Indeed. Well, great getting your insights. Tom Forte, thank you for joining us this afternoon. Have a good one.