Is Amazon About to Raise the Stakes Against Netflix?

At $79 a pop per year, Amazon Prime is a steal. Maybe even a little too good.

Prime members get free two-day shipping, access to a free Kindle Lending Library, and a constantly growing collection of online video streaming. Prime Instant Video has always clearly been an Amazon.com (Nasdaq: AMZN  ) potshot at video-streaming king Netflix (Nasdaq: NFLX  ) . The economics of Prime have inevitably become a hindrance to a direct head-to-head face off, since Netflix's library still tops Prime's.

That $79 annual Prime membership fee has to support all three of those compelling value propositions, so some sacrifices in Prime Video content are to be expected. On the other hand, Netflix rakes in $8 per month, or $96 annually, from subscribers that it can devote to building up content offerings.

Prime has an estimated 7 million to 8 million subscribers, far fewer than the 21.4 million streaming subscribers that Netflix ended the third quarter with. Keep in mind that Netflix is on deck to release fourth-quarter results tonight, so we'll see how its subscriber base changes.

Netflix recently landed an exclusive content deal, resurrecting cult favorite Arrested Development, flexing its content budget in the process, and relegating Prime members to watch nearly decade-old reruns. Meanwhile, Coinstar (Nasdaq: CSTR  ) may finally be readying a streaming offering after years of overpromising and underdelivering, and DISH Network (Nasdaq: DISH  ) now offers Blockbuster Movie Pass.

According to the New York Post, Amazon may be thinking about spinning off its streaming video service into a standalone subscription. Content execs have potentially spilled the beans, with one saying the current arrangement "is contractually an issue for the licensers." Prime Video is approaching its first birthday and has quickly grown to nearly 13,000 titles.

With as much value as Amazon has been jam-packing into that $79 fee, I'm not surprised that it's not economically sustainable at this rate. Breaking off the video service would simplify its content budget and make it more feasible to keep adding titles.

The immediate issue would be how to handle the transition. The move could somewhat justifiably be construed as a price increase, and we all know how that worked out for Netflix. Assuming that Amazon cuts Video out of Prime, current Prime members would be awfully peeved at choosing between losing something they're accustomed to or forking over more dollars. Netflix subscribers weren't too happy when faced with the same ultimatum.

Don't forget that Amazon owns LOVEFiLM, which is the "Netflix of Europe," complete with the red envelopes for its mail service. Could the e-tail giant be thinking about bringing that brand stateside? Only time will tell.

It would be the right move for Amazon, but it will need some serious PR spin to pull it off without a hitch.

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Fool contributor Evan Niu owns shares of Amazon.com, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix, Coinstar, and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


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