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Netflix's Reed Hastings Is Missing the Point on Amazon

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Never underestimate your competitor. Netflix's (Nasdaq: NFLX  ) Reed Hastings has that part right.

In an interview with Dow Jones editors in New York this week, Netflix's CEO makes it clear that (Nasdaq: AMZN  ) will be a real foe one day. It certainly doesn't seem that way now, especially as third-party studies show that Netflix streams are generating nearly 20 times the traffic during peak primetime viewing hours.

However, Hastings has it wrong when he suggests that Amazon is losing between $500 million and $1 billion a year on the Prime Instant Video service that it makes available to Amazon Prime members at no additional cost.

Yes, that's technically what Amazon may be shelling out to studios for content these days, but is it fair to call that a loss?

Seeing red
When Netflix was paying slightly more than that last year for its streaming content -- before its controversial summertime move in charging separate fees for digital and DVD subscriptions -- was it losing all of that money on streaming? No. It was an investment. It was part of the value in the original disc-based plan. It's not a surprise that since Netflix split the services into two distinct offerings that it has shed more than a third of its DVD-based members. The perceived value of the original plan just isn't the same.

Why can't we make the same argument for Amazon?

DVD rentals in general may have peaked, but they're not dead. Analysts see Redbox parent Coinstar (Nasdaq: CSTR  ) growing its revenue by 20% this year and another 13% come 2013.

The real question to ask here is how many Amazon Prime members -- paying $79 a year for subsidized shipping as well as Prime Instant Videos and monthly Kindle rentals of select titles -- are signing up or sticking around because of the streaming movies and TV shows.

It's actually some pretty brilliant bundling on Amazon's behalf. A few years ago, folks were drawn to Amazon Prime to get free two-day shipping on small media items that typically weren't subsidized. Shoppers wanting a single book, CD, or DVD didn't have to think twice about buying the item through Amazon. It would be theirs in two days.

However, as these same early adopters move on to digital reads on Kindles (and that includes non-Kindle owners given the popularity of the Kindle app across most mobile gadgetry) and digital video, they should require fewer Amazon Prime shipments, but the value is even better because of the free e-book rentals and video streams.

Think about that. At its peak, Netflix was spending more than $500 million a year on postage. It portrayed the investment in streaming as a way to eat into the costs of physical fulfillment. Why can't we give Amazon the same luxury in viewing Prime Instant Video as a way to save money on subsidized shipping?

Seeing green
Netflix has to be feeling envious these days. Its service is as popular as ever, with more than 30 million streaming accounts. However, the stock is trading nearly 75% lower than it was when it peaked last year. Investors just aren't happy with the way margins have contracted as expansion overseas and new content deals have eaten away at its bottom line.

However, isn't that what Amazon is doing these days? Margins have been pressured as it invests in the devices and media delivery of tomorrow. Analysts now see Amazon posting a small loss for all of 2012, despite a projected 29% uptick in net sales. Poor Netflix has seen its stock battered with that approach, yet Amazon hit a fresh all-time high just a few weeks ago.

So what is Hastings trying to do? Is he trying to bring down Amazon's stock by pointing to the streaming investments that are still a fraction of Netflix's own digital overhead? Is he trying to prop up his own shares by pointing out Netflix's superiority in this aspect of its model? Or could it be that he's just jealous because his company is paying the price for abandoning the model of including streams as part of a larger subscription service that Amazon is currently offering as it remains a hit with investors?

He knows he can't go back to that place. There's no time machine out there that can shuttle him back to pre-July 2011, when he would be able to retain DVD-based defectors and attract new ones to the plan with a growing arsenal of streaming content.

See, Amazon isn't losing as much as $1 billion a year on digital video -- it's taunting Netflix with it.

Stream on
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Read/Post Comments (2) | Recommend This Article (7)

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 November 19, 2012, at 9:14 PM, 20hotrod wrote:

    If you have ever sampled Amazon Prime after having been a Netflix user, you would be very displeased with Amazon. I am not negative on Amazon. I do a lot of shopping on Amazon. I looked forward to trying Amazon Prime. Unfortunately it was a chore to search for movies on Amazon. Unlike Netflix which offers you a screen full of thumbnail movie links, Amazon makes you browse thru movies the same way you browse for merchandise. You not only have to browse among the free prime videos, but also among the pay per view movies. It is

    cumbersome and tiring. Then when you try to watch an Amazon movie, you discover that your "smart tv" doesn't support Amazon prime. Needless to say I canceled my free trial of Amazon Prime.

  • Report this Comment On November 20, 2012, at 12:05 AM, BentMike wrote:

    This is just weird, and an Editor's Pick to boot. All this attribution of personal feelings where nothing of the sort can be know. Amazon is taunting Netflix? Netflix envies Amazon? Hastings is trying to bring down Amazon's stck price? For shame. Please pick a substantive article tomorrow.

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