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5 Things Amazon Needs to Do to Kill Netflix

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In the wake of this week's Netflix (Nasdaq: NFLX  ) PR and service disaster, many armchair CEOs have been pondering the fate of Netflix, especially in the face of potential competition from the likes of Microsoft (Nasdaq: MSFT  ) , Apple (Nasdaq: AAPL  ) , Wal-Mart's (NYSE: WMT  ) Vudu, and legacy content pipes like Comcast (Nasdaq: CMCSA  ) and Verizon (NYSE: VZ  ) . For my money, the biggest potential winner from this and further Netflix stumbles is Amazon (Nasdaq: AMZN  ) . I said as much during my own self-indulgent armchair-CEO-ing earlier this week, but I wanted to expand on the challenges and the opportunities that I see Amazon facing as it squares off with Netflix and tries to send it to an early grave, or at least beat it until it's weak enough for Amazon itself to easily swallow.

A few assumptions
Although I have been amazed at the Netflix screwups this week, the streaming entertainment business is still, in my opinion, Netflix's business to lose. I'm sure Reed Hastings and his team will learn from this week's disaster and continue to try to stay ahead of the disorganized mob of potential competitors. Although longtime Netflix users are ticked about the upcoming split and increasing complexity of the system this week, it doesn't take much messing around with alternatives to figure out that most of them are even more difficult to work with than Netflix. Even a Netflix plus (ugh) "Qwikster" model will be easier to navigate and manage than Amazon's instant video service.

Let's also take this as a given: Content will matter. Right now, Netflix has a lead in many kinds of content, and Amazon will need to fix that situation. I think Amazon is already likely to have enough experience in this field to outmaneuver Netflix. Amazon has learned a lot about the sensitivities of old media with its well-publicized scuffles over Kindle content. Moreover, Amazon's scale and variety of products could provide it with a valuable edge in the bidding for top-notch entertainment.

Still, this won't be an easy battle. What does Amazon need to do to up its game and take out Netflix?

1. Copy the good stuff
Netflix has Amazon beat by a million miles in ease of use. Netflix's website features streamlined choices, intuitive navigation, and puts everything you need right under your pointer (or finger). By comparison, Amazon still looks like a 10-year-old e-commerce site, with too many left links, competing text and graphics all over the place, and not even a rudimentary queue or management system. Amazon should emulate these great features of the Netflix experience right now.

2. Top it
Copying the competition may sound unfair, but it's how business works. And Amazon need not provide a slavish duplicate of Netflix's online experience. In fact, I think Amazon knows enough about its current customers to improve greatly on one of the alleged, indestructible advantages at Netflix: knowledge of member preferences. While Netflix knows a ton about the hundreds of movies and programs I've rated, its much-ballyhooed recommendation engine still fails to interest me most of the time. I don't know whether that's because it's trying to steer me toward watching cheaper content, or because it's just bad at what it does, but I think Amazon can equal, or top it.

Look at it this way: Amazon not only knows what movies and music I've purchased through it, it knows that, for instance, I do a lot of my own handyman work at home (thus orders for toilet valves, dangerous power tools, and half-gallon jugs of Bactine). From bits of data like this, it's probably pretty easy for Amazon to figure out that I'd be interested in something like Discovery's Dirty Jobs. That could be a potent advantage for Amazon, something Netflix will never have.

3. App it up
Part of Netflix's current competitive advantage is its streaming app's position in nearly every potential media device, from little set-top boxes to Apple TV, smart TVs, and iPhone, iPad, and even Windows Phone 7 devices. Amazon's streaming app is in fewer places, and in my experience, it's much more difficult to use. Heck, I didn't even know it was possible for my Samsung TV to access the free streaming that I get as part of Amazon Prime, because the Amazon streaming widget is a subwidget of a Yahoo! widget. (I am not making that up.)

Amazon needs to get its developers working on these platforms, and while it's doing so, it ought to make sure the experience is more consistent from device to device. As I have noted before, Netflix's streaming apps vary wildly in quality. The Windows Phone 7 app? First rate. Xbox 360, pretty good. Samsung TV, pretty crummy.

4. Mr. Bezos, get your Hulu on
The poorly kept secret of the Hulu bidding war includes Amazon among the list of final suitors. In my experience, Hulu operates a first-rate service with the potential to disrupt a lot of Netflix's streaming business. The movie selection at Hulu is pitiful, but Netflix's latest streaming content addition, Z-list programs from Osiris Entertainment, is just as pathetic.

Where Hulu outshines Netflix is in television. It has access to a lot more TV content, fresher content such as 30 Rock, Family Guy, Glee, The Daily Show, and The Office. That means it's beating Netflix on turf it has wanted to own: Reed Hastings has said he's happy with Netflix streaming being "rerun TV," and unfortunately for him, the reruns at Hulu are just better. Moreover, Hulu's service is already a good bargain, at $8 a month, with very few ads, and very good organization and queue management, plus top-notch viewing apps for set-top boxes, mobile devices, Xbox 360, and smart TVs. The user base may be small now, but the system and potential make this a good grab for a partner, like Amazon, that has the financial heft and the customer intelligence to promote it and grow it intelligently.

5. Get the tablet right
There are high hopes resting on the Amazon tablet, but I'm not among those predicting a market-beater. I believe what a tech analyst once quipped, which is that there probably isn't a tablet market, there's an iPad market. Luckily for Amazon, even on the iPad, the media consumption process is still pretty fragmented, requiring a variety of apps and subscriptions. Apple is no doubt working on removing these hurdles and unifying the media consumption experience (with iCloud an important component), and Microsoft is doing similar things with its centralization of Windows Live and Zune for the Windows Phone 7 update and upcoming hybrid OS, Windows 8.

If Amazon hopes that its tablet can be the razor that sells hundreds of millions of dollars worth of blades, it will need to make sure the hardware is hip and the experience is flawless. I'm not overly confident that will happen, given the dated looks and functionality of even the newest Kindle (and I'm a Kindle fan), but Amazon has shown that it gets constant, incremental improvement.

Foolish final thought
As a consumer, I can't wait to see how this plays out. No matter who comes out on top, I think our entertainment gadgets are going to be a lot smarter, more convenient, and more fun in the next few years. Unfortunately for investors, that won't translate into sure profits. The best business ideas always attract excess capital, and that tends to lower returns for everyone involved. That means we all might be better off as Amazon and Netflix subscribers than we would be Amazon or Netflix investors, depending on how low the margins eventually go for providers of streaming video. Winning businesses don't always have winning stocks.

Seth Jayson owned shares of Verizon, but no position in any other company mentioned here, at the time of publication. You can view his stock holdings. He is the co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool owns shares of Wal-Mart Stores, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Apple, Netflix, Microsoft, and Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a bear put spread position in Netflix. Motley Fool newsletter services have recommended creating a diagonal call position in 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. The Motley Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (24)

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 September 21, 2011, at 4:16 PM, JesseJamesFinn wrote:

    NETFLIX has opened up Pandora's box and now is trying to close it. I thought about how Amazon could thrash Netflix's perpetual blunders and a megalomaniac CEO ( and we thought the same thing!) who seems hell bent, on destroying their brand at a time when our economy and consumer discretionary spending is dropping off a cliff. Clues super CEO could have seen, MCD's lower SSS for August, Walmart and Target's assessment of our economic outlook and Costco's view point. Public information we Fools have, but a blind Netflix CEO. Nice read and thank you for your insights, Kudos Fellow Fool!

  • Report this Comment On September 21, 2011, at 4:51 PM, jb757 wrote:

    You missed the Big Reason - it's about money. $80 fee + $2.99 and up for the better movies you want to watch. The streaming content is better. The majority will stay with Netflix unless Amazon lowers prices. Streaming also competes with the DVD market; in this environment, you might as well rent a DVD or even a BD with 1080p resolution.

  • Report this Comment On September 21, 2011, at 5:32 PM, TMFBent wrote:

    I probably missed one of the biggest advantages Amazon could have with an integrated Hulu model: targeted advertising. Since Amazon knows what you buy and what you shop for, it should be able to place ads better than anyone else, and therefore command top dollar for those ads, if it decides to go that route.

  • Report this Comment On September 21, 2011, at 5:43 PM, mattack2 wrote:

    Hulu's service is NOT a bargain. It has ads. Netflix's streaming does NOT have ads, for the same price. Thus it is better.

    (I say this as someone who turned off streaming and went DVD only.)

  • Report this Comment On September 21, 2011, at 5:44 PM, CMFSoloFool wrote:

    Amazon has a long way to go, not only to compete with Netflix, but to gain a reasonable share of the market in general, which is growing more and more crowded.

    Netflix was priced for absolute perfection as it approached $300/share, and I've been bearish on them for a long time, which I have repeatedly stated here on TMF. However, my bearish slant was based on the silly expectations that were baked into the share price, not on Netflix imploding on itself. The CEO must have had an temporary brain tumor or something because the way they handled the price increase and divorcing Qwickster was pathetic.

    As for streaming, I'm not so sure the streaming content business is as robust as everyone makes it out to be. The video quality is still rather weak, and for someone who has a half-decent home theater with a 1080p set, it is not so trivial to overlook. You can keep your streaming convenience, I'll just pop-in a bluray, crank-up the 5.1 channel DTS master audio track, and completely lose myself for 2 hours in complete immersion of sound and visual bliss.

    For someone like me, the depth and currency of the movie vault is key. Netflix is neither very current, nor very deep. I'm not so much into TV, except for NFL football. Since I have a DVR and cable, I can record and watch TV without paying yet another subscription.

    I think Netflix will have a tough time bouncing back. But I'm not convinced Amazon can take them on either.

  • Report this Comment On September 21, 2011, at 6:44 PM, TMFBent wrote:

    Hulu's ads are few and short, and when Netflix streaming is acting up (pretty often at my house), the Hulu ads are much less disruptive than Netflix's caching messages. To say that Netflix is superior simply because it has no ads is pretty silly. Its much more complex than that. Consumers of TV and internet media have shown they are willing to put up with ads. And many of us would rather watch new shows on Hulu with a few ads than suffer through the Clist TV that makes up so much of the Netflix streaming catalog.

  • Report this Comment On September 21, 2011, at 6:49 PM, plange01 wrote:

    nflx is killing itself...

  • Report this Comment On September 22, 2011, at 12:27 AM, speedster400 wrote:

    @mattack2, Hulu is a bargain even with ads. A lot of people in America pay $80+ for cable with way more ads to get access to just a few channels that they actually will watch. $8 a month for a couple ads (less than those on cable) for exactly what I want to watch is much better.

  • Report this Comment On September 22, 2011, at 6:41 AM, ss06470 wrote:

    Netflix is approximately the same monthly fee as it always was when I was a happy customer for 7 years and there was no streaming. Where they screwed up was giving streaming for free and then changing their mind. People feel ripped off when they are used to getting it for free. Notice the anger when music companies dared to figure out how they could get paid. What they should have done and still can do is give it for free for 6 months as an introductory service, then charge.

  • Report this Comment On September 22, 2011, at 3:49 PM, theronrobley wrote:

    Netflix Will Sell Their DVD-By-Mail Business to Blockbuster:

    Rob Carpenter

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