Is Amazon Crazy -- Like a Fox?

Butch Cassidy: "They'll never follow us."
Sundance Kid: "How do you know?"
Butch Cassidy: "Would you jump if you didn't have to?"
Sundance Kid: "I have to and I'm not gonna."
-- from Butch Cassidy and the Sundance Kid (1969)

Amazon.com (Nasdaq: AMZN  ) is making jumps that it hopes rival video streamers like Netflix (Nasdaq: NFLX  ) and Dish Network's (Nasdaq: DISH  ) resurrected Blockbuster won't follow.

This morning, the company announced it has inked a video licensing deal with News Corp.'s (Nasdaq: NWSA  ) Twentieth Century Fox to add thousands of popular movies and TV shows to its Amazon Prime Instant Videos offering, including Paul Newman and Robert Redford's Western classic. A handful of other notable additions include The Last of the Mohicans, Mrs. Doubtfire, The Wonder Years, and one of my personal favorite TV shows, Arrested Development.

Prime's Instant Video offering now tops 11,000 titles available to members, more than twice the 5,000 available when the service debuted in February. A few short months ago, Amazon had brought the offering up to around 8,000 with a similar deal with CBS (NYSE: CBS  ) . Meanwhile, Netflix just reached a new streaming deal of its own with DreamWorks Animation (Nasdaq: DWA  ) after breaking things off with Liberty Starz (Nasdaq: LSTZA  ) .

Even though Prime's streaming library remains much slimmer than Netflix's, the value proposition is already compelling and becomes even more so as Amazon aggressively grows its arsenal. At $79 annually, it comes out to around $6.58 per month, 18% cheaper than Netflix's monthly $7.99. Incidentally, I actually signed up for my free trial last night just to take advantage of the free two-day shipping, but I may just end up keeping the service for the Instant Video.

Amazon is pushing Prime hard and it's going to pay off. While bundling streaming video with free two-day shipping may seem like a crazy combo, it's actually brilliance in disguise. It all comes back to building a moat. Amazon Prime members pay for a service that makes it more likely for them to shop on the site, its core business. Throwing in the Instant Video on the house just makes Prime that much more appealing and indirectly encourages you to keep buying stuff, since it will arrive on your doorstep in two days for free.

Throw in Netflix's recent missteps and Amazon has a real opportunity here to steal the show. Netflix better be taking notes.

Fool contributor Evan Niu owns shares of Amazon.com and hopes his free trial of Amazon Prime doesn't make him 1-Click trigger-happy, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Netflix, DreamWorks Animation SKG, and Amazon.com. Motley Fool newsletter services have recommended creating a bear put spread position in Netflix. 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 (5) | Recommend This Article (7)

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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 26, 2011, at 3:16 PM, nontechie wrote:

    I have become addicted to Amazon. I just no longer feel like wasting time running around town when I want to buy something--I just order it from Amazon, using Prime, and 2 days later I have it . . . effortlessly. Saves time, saves gas, saves bus fare. For me, the streaming service is icing on the cake, but tasty icing.

    The downside, of course, is that I must not be alone because I'm seeing vacant storefronts pop up all over town as fewer and fewer "bricks and mortar" merchants try to compete with Amazon and other web merchants. This is not good for city life, but it seems to inevitable.

  • Report this Comment On September 26, 2011, at 3:26 PM, Popnfresh100 wrote:

    It's actually the exact opposite of a moat- it's a bribe.

    When a customer signs up for prime, Amazon is obligated to give them free shipping. But it doesn't make the shipping itself free or the product cheaper. Amazon still has to pay just as much in marginal costs for both. And it doesn't make the customer with prime inherently more likely to order something from Amazon if someone else can still beat the all-in price.

    Prime DOES, however, limit Amazon's ability to lower the base price to attract new, non-prime customers.

  • Report this Comment On September 26, 2011, at 8:29 PM, XMFAimeeD wrote:

    Whaaa?? The Wonder Years?!? Finally! This is something no one has been able to get on DVD (or streaming) because of all the royalty/licensing issues with the music. I've been waiting forever for this. Thanks for including that, Evan!

    Aimee

  • Report this Comment On September 26, 2011, at 10:08 PM, TMFNewCow wrote:

    Aimee, you just made me pull up "With A Little Help From My Friends" on Spotify

    - Evan

  • Report this Comment On September 28, 2011, at 2:49 PM, chadscards1274 wrote:

    Up front let me say I am neither long or short NFLX or AMZN. I guess my question is if you are AMZN with the Kindle Fire coming out priced at $199 and you are charging $79 a year for Amazon Prime how is AMZN going to sell enough stuff to make these loss leaders work?

    Simple math tells me that AMZN is charging 18% less per month versus NFLX then AMZN has 18% less to pay for content. In addition AMZN is betting on likely losing money on each Kindle Fire hoping to make up for it in other sales down the line? Seems like Bezos and his crew are betting on a lot of sales of other things to help them make back what they lose upfront.

    The question I have to wonder is how long before the same content costs that are talked about so much for NFLX becomes an issue for AMZN? Seems to me the price of $79 a year for Prime does one of two things: 1. Limits how much they can spend on content or 2. The price changes if the streaming part of this offering becomes more of a central piece to why people sign up.

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