Netflix (NFLX -9.09%) CEO Reed Hastings was on CNBC Wednesday, and it didn't take long before Amazon.com (AMZN -2.56%) was brought up in the conversation.
"They're so scary," Hastings said. "Everything Amazon does is just so amazing."
Hastings wouldn't concede that Amazon is Netflix's biggest threat, but by praising the e-tail giant's accomplishments and tagging it as "awfully scary" later on, it's not much of a stretch to call Amazon the biggest potential disruptor to Netflix's disruption. Hastings is right to respect and fear Amazon. Let's go over a few reasons why Netflix can't take Amazon for granted.
Image source: Netflix.
1. Prime Video disrupts the value proposition
Netflix is undeniably a great value at $9.99 a month. It's such a great deal that when Netflix told longtime subscribers grandfathered into $7.99 or $8.99 a month that they would all be paying the new rate last year, we didn't see a mass exodus. Netflix wound up growing by a record 19 million net additions last year.
However, for the tens of millions of people already paying less than that -- $99 a year -- for Amazon Prime to get free two-day delivery of Amazon-warehoused merchandise, the fact that Amazon offers a growing digital catalog at no additional cost is huge.
Netflix has broader availability, and its original TV shows and specials are coming at a freakish pace. New seasons of House of Cards and Bloodline just days apart? Are you kidding me? However, Amazon has a reasonable collection of content, including some popular shows and movies that aren't available on Netflix -- as well as a couple of Emmy-nominated originals. For the growing number of people relying on Amazon for their shopping, the value proposition of quality video streams at no additional cost has to scare Netflix, even with 100 million subscribers.
2. Pay-per-stream is a difference maker at Amazon
You won't find most of last year's hottest movies on Netflix. They're on Amazon. Most of them aren't part of the digital smorgasbord that it serves up as a perk to Amazon Prime members, but Hollywood blockbusters are available as either digital downloads or rentals.
Netflix has made it clear that it doesn't want to play that game. If you want a brand new home video release just pay for its fading DVD service and wait a few weeks. However, Amazon offers instant gratification, and since Amazon and Netflix have found their way onto most set-top apps it makes it that much easier to close a transaction that was a heavy lift a few years ago. Amazon has your payment information and your consent.
3. Amazon is a loss leader leader
Grocery stores will stock cheap milk in the back, knowing that they can woo customers into adding additional items as they go through their supermarkets. Sometimes it seems that all of Amazon is cheap milk. It's not afraid to sell electronic gadgetry at a loss. Some would argue that Amazon can make that back in digital sales, but it offers massive online catalogs of video, music, and e-books at no additional cost to Amazon Prime members.
If Amazon thinks a niche is relevant -- from smart homes to restaurant delivery to cloud hosting -- it's going to rip off its robe and do a massive water-displacing cannonball into the pool. Right now, Amazon may appear to be merely toying with Netflix like a cat plays with a mouse before going in for the kill. It's letting Netflix do the dirty work of educating the global marketplace and breaking down content barriers. Netflix knows that Amazon is scary, but it doesn't seem scared. Spoiler alert: Netflix should be petrified.
