Good News for Amazon Is Bad News for Netflix

Amazon.com (Nasdaq: AMZN  ) is finally thinking outside the Unbox.

In an interview with The New York Times yesterday, Amazon's vice president of digital media detailed how the leading online retailer will begin offering video streaming through the new Amazon Video on Demand service.

Don't confuse this with Unbox, the company's fledging video service that delivers actual downloads of movies and television shows to computers and TiVo (Nasdaq: TIVO  ) boxes that are stored on consumer hard drives. Amazon's new tack is instant streaming a la Google's (Nasdaq: GOOG  ) YouTube. Unlike YouTube, Amazon's initial library of 40,000 shows and movies are premium content that consumers will have to pay to watch.

Who wants to pay to see celluloid on their clunky home PC or tiny laptop? Good question. Maybe unsophisticated couch potatoes who don't know how to hook up their Web-tethered computers to their television sets. Amazon is getting an assist here, teaming up with Sony (NYSE: SNE  ) to offer up an Amazon store for Wi-Fi-blessed Bravia television sets. This is similar to how Netflix (Nasdaq: NFLX  ) has enhanced the PC-based streaming it provides for free to existing subscribers by teaming up with home theater enablers like Roku, LG, and Microsoft (Nasdaq: MSFT  ) .

Amazon joins Sony, Netflix, and Microsoft -- and Apple (Nasdaq: AAPL  ) of course, with its Apple TV -- as a company trying to deal digital video directly into the living room.

At first, the trend may seem like a major win for Netflix. As the one company determined to serve up free video to its growing subscriber base, rivals will educate the market that Netflix can corner, for now, on price.

Unfortunately, there's a downside to all of this. Roughly 10,000 of the more than 100,000 discs available through Netflix are part of the Netflix streaming service. The selection consists mostly of television shows, older titles, and indie efforts. Netflix hopes that more studios will come on board in exchange for meager royalties, but that is unlikely to happen. Major studios aren't going to sacrifice DVD sales and traditional rentals by letting Netflix practically give them away as streamed rentals. Being part of a free, unlimited service devalues the product.

That isn't the only reason why Netflix may never go from offering 10% of its film catalog as cyberspace streams to offering 100%. Until studios grow disenchanted with the incremental revenue that is provided by "pay per stream" players like Amazon, they are going to ride those horses.

In other words, Amazon's new launch will be one more factor keeping the Netflix streaming service in check.

Other related newsies:

Microsoft is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Netflix, Amazon.com, and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz has been a subscriber -- and shareholder -- in Netflix since 2002. He also owns a piece of TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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