Content Costs and Revenue Are Rising for Digital Players (Analysis)

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Analysis: Investments in content are eating into profit as digital heavyweights like Netflix position themselves for the future

Wall Street earnings this week reflect the changing landscape of the entertainment business as digital players investing heavily in content are seeing both their costs and their revenue on the rise.

Netflix, Amazon and Redbox-parent Coinstar all reported rising content costs in the first quarter this week. There is some sticker shock: Netflix is shelling out a staggering $2 billion-plus a year on original programming and licensing of shows like “House of Cards” and “Arrested Development,” according to an 11-page manifesto posted by the company this week.

Meanwhile, Amazon is forking out 46% more in costs for technology, Kindle-related expense and streaming for Amazon Prime – to the tune of $1.38 billion. And even the little guy in the sandbox, Redbox, is buying more DVDs for its kiosks as it builds it own streaming service.

Their revenue is also on the rise:

>> Netflix reported a 15% jump in revenue to $1.02 billion, triggering a spike in its stock price this week.

Also read: Can Netflix's Stock Surge Last?

>> Amazon on Thursday reported a 22% jump in revenue, to $16.07 billion.

>> Coinstar, Redbox’s parent, reported a small increase in revenue, to $574.7 million.

What does this all mean?

It means that the new generation of entertainment companies is flexing its muscles by investing in content for the future, while already reflecting the revenue that comes with that bet. Netflix added more than 3 million new subscribers worldwide in the same quarter as it launched its most ambitious original series to-date, "House of Cards."

Also read: Amazon Q1 Revenue Surges on Digital Content Sales

Coinstar, which plans to change its name to Outerwall, expects to benefit from reduced competition from Blockbuster as it continues to shed stores and looks toward a streaming future.

These investments came with a cost, however. Amazon’s profit dropped $37% for the quarter to $82 million, while Redbox parent Coinstar reported a 58% decline in profit to $22.6 million.

Also read: IMAX Profits Rise on Stronger Box Office Results

In its letter to investors, Netflix promised that the company would focus on curating content.

"There is so much to watch that even the highest-demand titles don’t materially swing viewing,” the letter states. Instead of carrying as many titles as possible, "we are actively curating our service."

IMAX, meanwhile, benefited from content, but felt the sting from reduced investment in the first quarter. On Thursday, the bigscreen theater company reported a 14% profit gain to $2.86 million on stronger box office results during the first three months of the year. But its revenue slid 10% to $49.8 million on lower theater installations.