Will Amazon Kill Netflix With This Deal?

Netflix (Nasdaq: NFLX  ) used to have a few legs up on the digital-video competition. There's the brand recognition, integration with a wide range of home-entertainment hardware, a user-friendly design, that unique content recommendation system, low prices for unlimited streaming, and an unmatched content library. I envision a centipede tying its shoelaces here.

But Amazon.com (Nasdaq: AMZN  ) is closing the gap very quickly on at least one of these counts. Last Friday, the e-tailer partnered up with Comcast subsidiary NBC, bringing scores of popular TV series to the Amazon Prime platform. And the spending spree continues: Just days after Netflix's exclusive deal with Epix dropped that monogamous contract term, Amazon jumped aboard the Epix bandwagon, too.

This deal adds "thousands of new releases, classic library titles, and original programs" to Amazon Prime. The Epix catalog is populated by joint owners Viacom, Lions Gate Entertainment (NYSE: LGF  ) , and privately held Metro-Goldwyn-Mayer. This includes mega-hits like Iron Man 2 and Thor right away, thanks to Walt Disney (NYSE: DIS  ) division Marvel's distribution deal with Viacom's Paramount studio.

Lions Gate brings The Hunger Games to the party, but not until that film moves out of the exclusive DVD distribution window. When it does, that blockbuster will hit Amazon Prime and Netflix simultaneously. So will Marvel's The Avengers. Amazon is happy to point out these upcoming titles in its press materials, but the prominent blurb on Amazon's homepage wisely focuses on what's available right now.

Investors are taking this as a direct threat to Netflix's livelihood. Shares plunged as much as 11% on the news.

You should've seen this coming a mile away
Here's the thing: Amazon's partnership with Epix is indeed news, but hardly a shock.

Netflix investors have known that the exclusive deal was becoming an open marriage since it was first announced. Coinstar's (Nasdaq: CSTR  ) Redbox will include Epix titles in its streaming service, to be unveiled later this fall. The studios would be crazy not to pursue as many distribution partnerships as possible now that they can. Disney, Viacom, and Lions Gate will happily cash every available license check for the content they manage under the Epix brand.

Hollywood's future is written in digital licenses, folks.

So where's the big surprise? I don't see one. This looks like a classic case of nervous retail investors leaping to conclusions. This looks like a shocker on the surface, but only if you don't know Netflix that well. The end of the exclusive lockup period was discussed on the last earnings call, for goodness' sakes.

Amazon 1, Netflix 0? Not so fast!
It's not as if Amazon suddenly matched Netflix in every department. The company now boasts 25,000 titles under the Prime umbrella, but Netflix owns more than twice that many licenses. Advantage, still Netflix.

Netflix also holds a solid lead in hardware integration. Amazon has no answer for the recommendation engine, and users find that Netflix offers a far more intuitive rental experience -- all those years of spit-shining the online interface are paying off.

The Prime service is 18% cheaper than Netflix streams and also includes free two-day shipping when you shop at Amazon. And I suppose you could argue that Amazon's brand value trumps Netflix, especially in the wake of the Qwikster debacle of 2011. But I'm not entirely sure that Amazon has earned any consumer trust in the digital-video arena.

So Amazon may be a contender, but Netflix still holds several significant advantages over its rival, including a richer content library even after these new deals. These announcements did nothing to change my appraisal of Netflix, which is that domestic dominance plus international expansion add up to a massive business over the next five years. Feel free to treat this poorly motivated drop as another fantastic buy-in opportunity.

We're standing at the junction of two distinct eras in the movie industry's history, and Netflix is among the handful of companies poised to make the most of the change. Pick up our brand-new premium report on Netflix to learn all about this digital revolution. To ensure that you don't miss a beat in this rapidly changing industry, the report even comes with a full year of timely updates to our in-depth analysis. Get started.

Fool contributor Anders Bylund owns shares in Netflix and has created a bull call spread atop his shares, but he holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix, Walt Disney, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Walt Disney, Amazon.com, and Netflix and creating a bear put ladder position in Netflix. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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