How Amazon Studios went from grassroots idealist to Hollywood threat

The small army of comedians that swarmed Portland, Ore., last April for the Bridgetown Comedy Festival were sleeping off their hangovers from the previous night's festivities, or still drunkenly stumbling through the hallways of the Hotel Fifty.

Except for two of them.

Ben Roy and Adam Cayton-Holland -- members of the three-man Denver comedy gang, the Grawlix -- woke up early in their shared hotel room and grabbed their laptops to watch their sitcom pilot, "Those Who Can't," debut on Amazon.com. Their act had never had such a large stage, and the two men followed in real time as hundreds of customers banged out reviews. Their phones started ringing with interview requests.

"It was like Christmas morning," said Roy, a tattoo-covered dad, punk-band frontman and longtime stand-up comic.

This was exactly the sort of success story that Amazon envisioned when it unveiled its Hollywood arm, Amazon Studios, three years ago. Its purpose: Invest in video projects from Hollywood outsiders and let the world's biggest focus group -- Amazon's customer base -- approve or not. The idea was to help talent bubble up and, along the way, collect valuable data about what Amazon customers watch.

It's also a mission Amazon quickly downgraded from star to extra. Top customer ratings aren't enough for Amazon Studios and what it wants to achieve: namely, to challenge Netflix, upend the traditional studios and, above all, persuade millions of people to sign up for Amazon Prime, the $79-a-year service for second-day shipping on some items and for access to streaming movies and TV shows.

"Those Who Can't" earned the highest customer score of any Amazon pilot, but Amazon is betting potential Prime customers are more interested in big-named talent than the Gawlix gang. And so Amazon is spending as much as cable heavyweight HBO and others to create programs with top stars. To some degree, we've read this script before: Jeff Bezos bleeds millions -- think Kindle -- to bulk up and plow through an entrenched industry that he remakes in Amazon's image.

So when "Alpha House," Amazon's first full series, debuts Friday, it will star John Goodman, and include cameos by Stephen Colbert and Bill Murray. "Doonesbury" creator Garry Trudeau, the first comic-strip artist to win a Pulitzer, created the half-hour political comedy.

As one top talent agent put it, "Amazon has the potential to be very scary to its competitors because content is a very small part of its business." In other words, what's $10 million here and $10 million there when you're trying to overhaul the movie business as a way to lure lifelong Amazon customers?

Idealistic beginnings
When Roy Price, the founding director of the studio, rolled out Amazon Studios in November 2010, he positioned it as the "movie studio of the future," a sort of anti-Hollywood shop that helps aspiring movie makers and empowers them with Amazon's reach. "Today, the movie business is organized and decisions are made pretty much in one place, Hollywood," Price said in a promotional video aimed at amateur actors and screenwriters. "At Amazon Studios, we hope to discover voices that might not otherwise be heard."

Anyone could join, and Price invited members to submit scripts and suggest revisions, with the enticement that Warner Bros. could option films. If the projects went to theatrical release, the creator would get $200,000, plus a $400,000 bonus if the movie earned $60 million at the box office. So far, Warner Bros. has optioned none.

Amazon sweetened the pot for writers with the prospect of instant cash, promising to dole out $2.7 million in prize money to projects submitted in 2011. (The top prize, $1 million, went to a 34-year-old music composer from Mesa, Ariz., named Rob Gardner. He made a rudimentary full-length animation mockup of his children's musical about princesses. Gardner, who didn't reply to requests for comment, is still raising money, most recently on Kickstarter.)

Read: New Amazon movie studio seeks submissions

Each step of the way, Amazon learned a bit more. The data showed, for instance, that many of the most popular scripts were comedies. Price used the submission system and customer reaction to scripts to test out stories before shooting anything, he said. It was the first of many ways Amazon would use data to decide which movies and shows to bankroll.

The premise, however, wasn't quite right. The customers involved didn't represent the audience Amazon ultimately needed -- people who like to shop a lot online. People who read scripts, Price said, are a rare niche.

Jack Epps Jr., who co-wrote "Top Gun," is a University of Southern California's School of Cinematic Arts professor and was an unofficial adviser to Amazon early on. He said this kind of pre-testing is vulnerable to the same trap as all focus groups: they're all supposed to represent what people want, but often they don't.

"Nobody knows what they want until it's there," he said. He gave the example of AMC's critical and ratings darling "Breaking Bad." What focus group would have ever applauded a show about a cancer-stricken high-school teacher cooking meth?

It didn't help Amazon Studios that the submitted scripts needed work.

"Some were better than others, but there was nothing that jumped out at me and said "God, I'd like to option this,'" said Michael Taylor, a producer and another USC professor who judged Amazon movie scripts in the early days. "It's probably a very good idea that they evolved to the in-house development....They've taken control over the process."

Falling behind Netflix
In early 2012, Amazon Studios was far behind the original content race. It had been a year since Netflix, looking at its viewer data, outbid HBO with a reported $100 million commitment for two seasons of "House of Cards." Its first original TV show, "Lilyhammer," premiered that February, and Netflix Chief Executive Reed Hastings was telling investors that Netflix would lavish its original series with up to 15 percent of its content budget, which was already three times the size of Amazon's. Amazon's service, he declared, was "a confusing mess."

And so began the march to make it all more professional, although Price wouldn't talk about why Amazon changed strategy. He brought on a television development team with people whose resumes boast stints at 20th Century Fox and Sony Pictures Family Entertainment.

"We explicitly decided to include both an open online process of submitting ideas and have a robust traditional development process, reaching out to top talent, top producers," Price said. "With TV, the goal was to get the best shows we could and to make progress quickly."

Epps, the "Top Gun" screenwriter and one of the first people to publicly applaud Amazon Studio's open-invitation system, said the new direction is smarter if Amazon wants to make headway. "At the end of the day, they still went to a successful writer to pull off their series," said Epps.

Price has stayed mum about the budget for "Alpha House," but he did say that Amazon is spending as much as big production houses would on any high-end TV series. The set, at the Kaufman Astoria Studios in New York, reflects that, including a replica of the Russell Senate Office Building, precise down to the mailbox slots and marble. On the day I visited, one of the stars, Mark Consuelos, half joked that the quality of a show's catering matches the quality of the production. "The food is hard-core," he said, gratified that the spread included almond milk.

A data-driven operation
Even if Amazon isn't outspending Netflix -- remember, Netflix paid a reported $100 million for "House of Cards" -- it's likely beating Netflix's data dedication. The company has also culled from statistics about what movies and shows people buy on Amazon.com and what they look up on the Internet Movie Database, which Amazon bought in 1998.

"Amazon customers like 'Breaking Bad' and they like 'Downton Abbey,' so maybe we should develop a show about aristocrats in Surrey who are also crystal meth dealers?" Price said in an October keynote at an entertainment conference in France. "Too simplistic."

So Amazon plowed deeper into the data. In April of this year, Amazon Studios put 14 pilots up for all customers to watch and rate, including "Alpha House" and "Those Who Can't." It used those customer ratings plus viewing data to help pick programs to make into full series. Joe Lewis, a former Fox development manager who was Price's first hire to work on television, said the company looked at how many people finish watching a pilot, how many watch more than once, and how many write a review. Price noted that different shows draw in different audience segments, and "it helps to be attracting the right group."

In essence, it made Amazon the first studio with ratings for its shows before they're really "shows" -- that is, before it gives the green light to a full series.

Price likened it to owning a restaurant, and testing out a special entree one night before printing up entirely new menus. He also has said that human oversight is essential too. "It's not just like you walk in Tuesday morning and the computer tells you which shows to order," he said at the conference in France. "You still have to apply human judgment."

Amazon is still starkly behind Netflix in several respects. A study by Sandvine, which runs fixed and mobile data networks worldwide, found that Netflix commands the largest amount of North American Internet traffic of any Web property, 31 percent of the total volume during the peak part of the day. Amazon Video represented just 1.61 percent.

Part of the problem is simple awareness, said Edward S. Williams, an analyst for BMO Capital Markets. People think of Amazon Prime for its shipping bargains, he said, but most Prime subscribers -- estimated at 12 million people -- seem unaware that a premium video service comes with the membership. Netflix, by contrast, has more than 43 million members worldwide.

But others involved with Amazon Studios productions noted how Amazon has quickly become a peer to industry heavyweights in other ways.

"Amazon is now considered up there with Netflix, FX, anywhere you would go to pitch," said Jill Soloway, the writer and director of a pilot Amazon is shooting, "Transparent," as well as an Emmy nominee for her work writing for "Six Feet Under."

There are differences, she said: if anything, working with Amazon was easier and better than with a typical studio. "Amazon had a business model that felt incredibly fast. Because they're so new, they don't have the levels of infrastructure," she said. "You're usually going through three rounds of notes at each stage, and things can really get paralyzed over the years."

Retailer versus entertainer
The most fundamental way that Amazon differs from its competition, however, is its identity. At its core, Amazon is a retailer. And Bezos, competitors know all too well, willingly sacrifices profits to build out his businesses.

In the new book "The Everything Store: Jeff Bezos and the Age of Amazon," journalist Brad Stone recounts how Amazon was in a bidding war with Walmart over Quidsi, the operator of Diapers.com, at the same time it launched Amazon Mom, which offered a yearlong Prime subscription and a 30 percent discount on diapers. Quidsi executives calculated that the program would cost Amazon $100 million over three months just on diapers. And one of Bezos' deputies warned that the CEO would drive diaper prices to zero if Walmart won Quidsi.

"Ultimately, any established player should be concerned when Amazon decides to enter your market, invest heavily to take away market share, with no accountability for traditional measures of profitability, while Wall Street continues to reward them on their long-term strategy," said Steve Felter, who launched digital projects at Warner Bros. and Disney before leaving to run his own gaming startup, GameSalad.

How does Amazon Studios fit into that long-term strategy? It comes down to Prime, which is becoming ever more powerful for the company. Analysts estimate that Prime subscribers spend between two and four times as much on Amazon as nonmembers do. Additional features, like original shows from Amazon Studios, could reel in new types of customers. Amazon's decision to release most episodes of its original series week to week, in contrast with the Netflix approach of unleashing them all in one bingeable bunch, supports that idea -- tease your viewers, keep them coming back to the store.

Amazon is also giving everyone a free taste of its originals, having found that a good proportion of the people who sign up for free trial memberships end up as paying subscribers. The first three episodes of its series will be available for anyone to watch, but the rest are reserved for Prime.

Next up, Amazon is casting Prime as a true Netflix challenger by moving into edgy dramas, the type of originals that made a name for Netflix in Hollywood. Since Netflix won three Emmys for "House of Cards," Amazon's unofficial stance is to win awards like that too, said Jonathan Alter, an "Alpha House" executive producer.

Late last month, Amazon announced plans for two hour-long drama pilots from Chris Carter, the creator of "The X-Files," as well as best-selling author Michael Connelly and Eric Overmyer, who wrote for "The Wire" and co-created the HBO drama "Treme."

Even the creator of "Alpha House" couldn't resist lampooning the oddity of a television studio creating content to get more people to sign up for rush orders of blenders and Blu-Ray discs. At the New York premiere of the series, in a 700-seat theater of the Metropolitan Museum of Art, Garry Trudeau thanked Bezos -- he called him "Mr. B" -- and Amazon before addressing the audience.

"We hope you enjoy our show," he said, "and will spread the word about our sex, our violence, and of course, our free two-day shipping." Which, funny as it sounds, is exactly what Mr. B hopes will happen.