Will Apple and Amazon Kill Netflix?

The rest of the dot-com darlings took too long to take on Netflix (Nasdaq: NFLX  ) . Now, as the video-rental giant grows increasingly dominant, would-be usurpers are getting aggressive.

Apple watcher 9to5Mac.com reports that Apple (Nasdaq: AAPL  ) sent out promotional codes for a free iTunes movie rental to many registered iTunes users yesterday. It's good for a 24-hour digital rental on any of the 8,500 flicks available for online distribution.

The value of an Apple rental isn't much. The hottest titles fetch just $3.99 for the rental, or $4.99 for the high-def version.

However, this is clearly a way for Apple to gain traction in the booming trend that's drumming up traffic for Hulu and Netflix's online streaming. In its latest quarter, more than 11 million of Netflix's 16.9 million subscribers took advantage of the service's Watch Now streaming service.

If iTunes can win converts to its digital video marketplace, that should also bode well for the company's fledgling Apple TV gadget.

DVD renters are closing up shop around the country, and Coinstar's (Nasdaq: CSTR  ) Redbox and Netflix are holding back from offering new releases during their first four weeks on the market. Thus, Apple's offer arrives as many of the hottest rental titles simply aren't available yet through Redbox or Netflix.

Nice shot, Apple -- but someone else is coming on even stronger.

Bang a gong, Amazon
Apple's aiming well, but its bite-sized digital sample is no match for what Amazon.com (Nasdaq: AMZN  ) is cooking up.

Yesterday's Wall Street Journal claims that the leading online retailing is developing a streaming service for movies and television shows. In and of itself, that isn't really much of a surprise. Amazon has had its envious eyes on the Netflix model for years, and its Video on Demand service already offers an iTunes-like selection of streaming or downloadable movies and television shows for individual purchase.

However, Amazon reportedly plans to bundle said service with its Amazon Prime memberships. There are already plenty of people paying Amazon $79 a year for free two-day shipping on any Amazon-stocked item, along with sharply discounted overnight deliveries. If Amazon starts offering streaming content to those Amazon loyalists at no additional cost -- the way Netflix has offered streaming at no additional cost to its subscribers on unlimited disc plans -- it's about to become a major player in digital streaming.

Content is king, but jokers are wild
The challenge for Amazon, of course, is attracting content worth streaming. If all that Amazon can line up is classic television shows and obscure films, it won't make much of a difference.

Netflix is paying big money for desirable streaming content, and cable television provider Comcast's (Nasdaq: CMCSA  ) Xfinity TV is beginning to let subscribers stream on-demand content through their computers, and even iPads, at no additional cost. Time Warner's (NYSE: TWX  ) HBO Go similarly lets subscribers to the premium movie channel stream its award-winning programming.

Amazon can't afford to play it safe -- or cheap -- now.

Thankfully, there are two tailwind gusts working in its favor. For starters, Amazon already has a healthy relationship with studios, as one of the country's leading retailers of movies and television shows on DVD. Studios have to trust that Amazon wouldn't do something that would cost it the outright sale of optical discs.

However, the biggest ace up Amazon's sleeve is that studios are rightfully worried about Netflix. The more dominant Netflix becomes in digital distribution, the easier it gets for CEO Reed Hastings to call the shots in Hollywood.

Netflix expects to close out the year with as many as 19.7 million subscribers, and millions more will be added next year. A studio that fails to play by Netflix's rules will be the equivalent of a movie studio getting blackballed at one of the largest multiplex chains. Every music label dreads Apple's power through iTunes. The same thing is happening to Netflix, so it's in Hollywood's best interest if Amazon and Apple become the service's worthy competitors.

Don't be surprised if studios go out of their way to make sure that Amazon, Apple, Redbox, and even Wal-Mart (NYSE: WMT  ) have credible digital libraries, if any of them are actually serious about taking on Netflix.

Perhaps they're already too late, and Netflix is already too big. Still, Apple and Amazon won't know whether they have what it takes until they give it a shot.

Which rival offering makes Netflix the most vulnerable? Share your thoughts in the comment box below.

Wal-Mart Stores is a Motley Fool Inside Value pick. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. Wal-Mart Stores is a Motley Fool Global Gains pick. The Fool owns shares of Apple, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick 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.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2010, at 1:10 PM, demodave wrote:

    Why would you suggest that Apple will kill Netflix, when Apple TV allows Netflix streaming as one of its highly touted features? Surely, there will be some competition there, between iTunes and Netflix, but if the Apple TV really is helping more people watch more Netflix, that's still more business for Netflix. That said, I'm surely not privy to the details of the agreement. Maybe Apple is charging a Google-like "click-thru" fee for each Netflick click.

  • Report this Comment On December 07, 2010, at 2:01 PM, digitalgo wrote:

    Rick, how can you imagine that Redbox will compete in streaming? After their duping the street on the bizarre same-store-sales methodology, I don't see Hollywood trusting them.

  • Report this Comment On December 07, 2010, at 2:28 PM, BioBat wrote:

    Redbox streaming - as real as Superman, Santa Claus, and the Easter Bunny.

  • Report this Comment On December 07, 2010, at 6:03 PM, Pandorabelle wrote:

    Netflix is killing itself.

    The CFO just bailed taking $20mil in profits.

    Does a house have to fall on you?

  • Report this Comment On December 07, 2010, at 6:12 PM, jm7700229 wrote:

    NFLX is grossly overpriced -- valued as if there were no challenges for years to come. Sorry, but with the barrier to entry as low as it is, NFLX will need to keep its margins very low in order to maintain dominance -- if it can do so at all.

    I think NFLX shot themselves in the foot by deciding to punish people for taking DVDs in the mail. They don't have enough on-line content, and the streaming does not permit captioning, a must for the hearing impaired like my wife and me. I will be going with the competition (anyone but APPL).

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