Will Top Gear Make Amazon The World's Most Valuable Company?
Top Gear is a British television series about cars produced by the BBC. In itself that sounds a bit mundane but Top Gear has held the title of the most widely watched factual TV programme according to the Guinness World Records. It is often reported in the press that the show had a viewership of 350 million people worldwide.
A lot of Top Gear’s success was due to the popularity of its three co-hosts – Jeremy Clarkson, Richard Hammond and James May. Viewers tuned in as much to learn about cars as they did to see Jeremy, Richard and James’ funny and politically incorrect misadventures. However, this all ended in early 2015 when all three co-hosts left the show following an altercation between Jeremy Clarkson and one of the show’s producers.
The BBC re-launched Top Gear with new hosts but it hasn’t come close to the old show’s popularity. In the meantime, Jeremy, Richard and James have been involved in the creation of a brand new show. This is where Amazon comes in.
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Amazon pays US$250 million to make a new Top Gear like show
In mid-2015, Amazon announced it had signed Jeremy, Richard and James to make a new Top Gear like show which would be launched in 2016. The deal was reportedly worth US$250 million to produce 36 episodes over three years.
Let’s put the US$250 million in some perspective.
Over 36 episodes, that is nearly US$7 million per episode which is multiple times the BBC’s reported budget for each of the original Top Gear episodes. Even the early seasons of the hugely popular TV series Game of Thrones cost less money to make, at a reported US$6 million per episode.
Perhaps that explains why the CEO of Netflix, which also bid for the services of the ex-Top Gear hosts, reportedly said “wow, that’s a lot of money”. Even Amazon’s CEO Jeff Bezos admitted that the new show is “very, very, very expensive”.
So why would a smart company like Amazon pay so much money to make a show about three middle-aged men driving around in cars?
It is all about Amazon Prime
The new Amazon motoring show, which is called The Grand Tour, starts airing on 18 November 2016. The show is available exclusively to members of Amazon Prime.
In the US and UK, Amazon Prime membership costs US$99 and GBP79 per year. Among a myriad of benefits, Prime members receive free delivery on their many Amazon purchases and access to a huge library of books, music, movies and TV shows (such as The Grand Tour) for no additional cost.
Work by Wall Street analysts suggest Amazon has approximately 69 million Prime members. In addition, research firm Consumer Intelligence Research Partners estimates Prime members spent an estimated US$1,200 with Amazon in 2015 versus $500 for non-Prime members.
For Amazon, The Grand Tour is all about signing up new Amazon Prime members and continuing to rapidly increase the company’s annuity like revenue base.
The maths is straightforward
Earlier on we mentioned the often quoted viewership numbers for Top Gear when the ex-hosts were involved with the show. It was around 350 million viewers.
Conservatively, let’s say 2% of those 350 million viewers end up signing up for Amazon Prime membership so they can watch The Grand Tour and access other Prime member benefits. That would result in 7 million new Amazon Prime members spending on average US$1,200 per year providing Amazon with incremental annual revenue of US$8.4 billion.
Amazon currently trades on a 2.9x enterprise value to FY2016 revenue multiple. On this basis, the US$8.4 billion of incremental revenues are worth an increase in Amazon’s market value by US$24.4 billion, or approximately a 6% increase in the value of Amazon shares. If The Grand Tour ends up being wildly successful, and 5%-10% of the old Top Gear viewership sign up to become new Prime members, this could potentially add 15%-30% to the value of Amazon shares. If this happened, Amazon could be worth around US$520 billion and become the world’s third most valuable listed company, just behind Apple and Google’s current market value.
Amazon’s “very, very, very expensive” new motoring TV show might just prove to be a very, very, very good investment for Amazon shareholders.
One or more of AtlasTrend’s managed funds own Amazon shares.
Kent Kwan is a co-founder of AtlasTrend, a global equities fund manager that makes it easy for anyone to invest in the world's most thriving trends.
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