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Will Amazon Prime's Video Content Library Overtake Netflix's?

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Last Thursday, (NASDAQ: AMZN  ) announced another new video content deal for its Prime Instant Video service. This time, Prime Instant Video will add a variety of shows from Comcast (NASDAQ: CMCSA  ) unit NBCUniversal. The series being added to the service include Grimm, Covert Affairs, Hannibal, and Smash. With these new content additions, Prime Instant Video now includes more than 40,000 movies and TV episodes.

Amazon has been investing a lot of money in Prime Instant Video content recently, in an attempt to catch up with Internet video leader Netflix (NASDAQ: NFLX  ) . Earlier this year, analysts estimated that the Netflix content library was at least double the size of Amazon Prime's library . However, Amazon is quickly closing the gap, due to its own heavy investments and Netflix's focus on "curated" content: i.e., emphasizing exclusive access to a smaller number of high-quality titles rather than a broad catalog.

As Amazon starts to rival Netflix in terms of the breadth of its offerings, the company could start to steal market share from Netflix. With Netflix stock seemingly priced for perfection, a slowdown in growth caused by competition from Prime Instant Video could catalyze a massive correction.

Prime catches up
Amazon launched the Prime Instant Video service in early 2011 with around 5,000 titles. The content library has grown rapidly since then, hitting 9,000 movies and TV episodes by July 2011; 17,000 by March 2012; 30,000 by December 2012; and 40,000 today. Netflix CEO Reed Hastings admitted last month that Amazon has been bidding much more aggressively for content over the past year.

While Amazon's video content library is growing rapidly, the same cannot be said for Netflix anymore. On May 1, Netflix added more than 500 new titles, but at the same time it lost nearly 2,000 movies. Netflix also disclosed in its first-quarter shareholder letter that it will allow a broad licensing agreement with Viacom to expire at the end of May.

A focus on quality
Instead, Netflix will try to acquire exclusive streaming rights for a few of the departing MTV, BET, and Nickelodeon shows. Netflix management has repeatedly stated in recent months that it would prefer to focus on exclusive arrangements rather than trying to offer a comprehensive catalog. While it costs more to license titles on an exclusive basis, Netflix believes that the best way to differentiate itself is through quality, not quantity.

This shift in strategy seems to be correlated with the entrance of Amazon and Hulu as active bidders for content.  Netflix probably realized that it would be drawn into an expensive bidding war if it committed to staying ahead of its rivals in terms of the number of movies and TV shows available.

However, while Amazon is increasing the quantity of content available for Prime subscribers, it is also improving its quality. Last year, Amazon won the exclusive streaming rights for TNT's The Closer, one of the most successful series in the history of cable TV. In February, Amazon announced that it had won the exclusive domestic streaming rights for the PBS hit Downton Abbey, beating out Netflix in the process.  Amazon's financial muscle could allow it to win more than its fair share of such deals going forward.

What it means
Netflix may still have a small edge over Amazon in terms of content quality, but the gap is rapidly shrinking. If Amazon puts a big marketing push behind Prime Instant Video and its new content, some Netflix users will be tempted to switch, particularly as the Netflix content library gets pared down.

Moreover, Amazon only charges $79 per year for Prime (or $39 per year for students), which includes other benefits such as free two-day shipping on most purchases and access to the Kindle lending library. Netflix is already priced slightly higher at approximately $96 per year. The competition from Amazon will discourage Netflix from raising prices for the foreseeable future.

Netflix has rebounded impressively from the Qwikster debacle of 2011. However, the company's new focus on "curated" exclusive content rather than broad licensing deals could alienate some subscribers when certain movies and TV shows disappear from the service. With Amazon quickly becoming a viable alternative, the risks for Netflix are greater than ever.

Learn more about Netflix
Can Netflix fend off burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

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