Is Amazon Prime a Real Threat to Netflix?

Amazon.com (NASDAQ: AMZN  ) plays it pretty close to the vest with a lot of its customer metrics, but it released a press release on Boxing Day to inform the world that it added more than 1 million new Amazon Prime members in the week leading up to Christmas. Earlier this month, a report from Consumer Intelligence Research Partners estimated the number of Prime members at 16.7 million, and Amazon claims "we now have tens of millions of members worldwide" -- implying at least 20 million. (Note, though, that some of those million new Amazon Prime members may include those signing up for a free one-month trial for their holiday shopping with the intent of dropping the service upon the trial's expiration.)

Amazon Prime's growth is outpacing Netflix's (NASDAQ: NFLX  ) , which reached 20 million streaming subscribers by the end of 2010, nearly four years after launching its instant streaming service. Comparatively, it took Amazon one year fewer to reach a similar subscription rate. Although I don't believe Prime is currently a large threat to Netflix, I believe it has the potential to become one.

Why do people subscribe to Amazon Prime?
The influx of Prime subscribers in the holiday season may indicate that more people are purchasing Prime for its two-day shipping. The recent increase in the minimum order price for Free Super Saver Shipping from Amazon may have led to an accelerated number of signups.

But Netflix, which only offers a singular service, typically sees an uptick in the number of signups during the holiday quarter as well. So, it's not farfetched that at least some Prime subscribers are looking for entertainment during the cold-weather season and see value in Prime's instant video selection.

Still, it's likely that many households with a Prime subscription also have a subscription to Netflix. Currently, Prime is not quite a replacement for Netflix, which maintains a larger video library and is now focused on curating the best content.

2013: The year Amazon Prime started competing with Netflix
At the end of last year, and even in March of this year, estimates for Prime subscribers were around 10 million. Part of what may have led to the fantastic growth over the last 12 months is Amazon expanding its video selection.

Amazon says that it increased its Prime Instant Video selection from 33,000 to more than 40,000 in 2013. Amazon added exclusive content from CBS/Showtime, Sony Pictures Television, A&E Networks, and Scripps Networks. It also picked up exclusive rights to Downton Abbey and tons of content from Viacom  (NASDAQ: VIA  ) after Netflix neglected to renew their contracts.

In fact, Netflix seemingly balked when its deal with Viacom expired. The streaming company demanded the right to pick and choose which programming it wanted instead of paying for a bundled package of Viacom programming. Viacom refused. Amazon stepped in and reportedly offered several hundred million dollars for multiyear rights to Viacom's bundle, including Nickelodeon kids programs and teen and adult entertainment from Comedy Central and MTV. This is exemplary of why content rights are increasing in price -- if one company doesn't buy the rights, another will.

Moreover, Amazon started adding exclusive original content to compete with Netflix's popular original series. The company says that Alpha House, one of its first originals, was the service's most streamed show in 2013. Neither Amazon nor Netflix will say how many people are actually streaming their originals, only that they're very popular.

Could 2014 be the year of Amazon Prime?
There's no doubt Netflix had a great year in 2013, but it might be more difficult to repeat its success in 2014. The company added more than 7 million streaming subscribers in the first nine months of the year, and expects to add more than 3 million more in the fourth quarter. Investors have rewarded the company's success by increasing its share price over 300% year to date, making my thumbs-down in CAPS look downright dumb.

But Netflix is facing the threat of rising content costs, which have already forced it to part with valuable content in 2013. Amazon, which sees a major boost in shopping revenue and profit (even after factoring in content costs) from Prime members, is better equipped to keep up with content price inflation than Netflix. It's started to show that in 2013, and as more content deals at Netflix expire in 2014 and beyond, I expect Amazon to snatch them up and become a stronger substitute for Netflix.

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Read/Post Comments (9) | Recommend This Article (2)

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  • Report this Comment On December 27, 2013, at 10:21 PM, duuude1 wrote:

    I'm sure that Reed took a careful look at Jeff before he committed Netflix to AWS. Maybe that was one of those "keep your enemies close" moves... Prime's videos were up and running when Netflix migrated their systems to AWS so you know that competition was part of Reed's calculations. I imagine Reed thinking of AWS as Amazon's next great growth story - and that politically it would be untenable for Amazon to directly compete with one of their own AWS customers - and that Amazon wants to provide AWS to everyone on the planet more than they want to be a video streamer. Who would trust a company who takes business from one of their valued and biggest AWS customers?

    And you can also bet that Jeff carefully considers whether his Prime service is or can directly compete with Netflix. I'm imagine Jeff looking at Netflix and Reed and thinking to himself:

    "Golly. Reed spends 26 hours a day thinking about how to better deliver video content to his subscribers and to growing his business. Gee. Do I think any of my lieutenants are a match for his team? Gosh. I'd best stay out of his path..."

    Here's a recent example of a high-powered technologist failing at subscription video delivery:

    http://gigaom.com/2013/12/27/rdios-would-be-netflix-killer-t...

    It takes more than a website and money and video content to compete with Netflix. Amazon cannot compete with Netflix by doing video streaming part time. Amazon currently accounts for 1/20th of Netflix's downstream network traffic according to a Sandvine report. AMZN's Prime subscribers (20M) are 1/2 of NFLX's subs (40M), and 1/20th of the network traffic. Can you do the cost-benefit calculation there? I'm sure Jeff can and does. What would you do if your similarly expensive efforts to license video content resulted in such paltry usage?

  • Report this Comment On December 27, 2013, at 10:51 PM, BossesBoss wrote:

    The only reason they had so many new subscribers is because they offered FREE delivery during the Holidays. Great Marketing gimmick but guarantee more than half drop off and never use the movies/t.v option. Not a real threat as of yet to Netflix!

  • Report this Comment On December 28, 2013, at 1:04 AM, mdeamer wrote:

    You can rent and buy movies/tv shows digitally with Amazon. That's how they will make up the difference. And Netflix can't offer that unless it is through their DVD/bluray subscription.

  • Report this Comment On December 28, 2013, at 10:18 AM, expoiltthespread wrote:

    AMZN will keep eating away at NFLX's market share. It simply has a much bigger bankroll to do so. Why do you think the CAPS community only gives NFLX a pathetic two stars?

  • Report this Comment On December 28, 2013, at 10:37 AM, dinopontino1 wrote:

    We are using both in my house via iPad and hdmi out from laptop. Their new releases are the same, flight, skyfall, red dawn. Alpha house and betas are funny. Amazon is cheaper. Most people I know that have prime, have netflix b/c they don't know about instant.

    I think netflix is in real trouble because people are going to see the advantage to v o d built into the apps over nflx and the can't raise prices to pay for more content. Amazons interface is now about as good as Netflix's though it's wonky on the some consoles.

    Also, you can get amazon instant for much less if u become an amazon mom or subscribe to any products like toilet paper or diapers essentially making instant free. Free is a good price.

  • Report this Comment On December 28, 2013, at 1:09 PM, Up2Here wrote:

    Amazon has a long way to go...and numbers based on adding 'free shipping' are not reliable. Overall, I don't love Amazon's future...here's why;

    Although Netflix's streaming library may be slightly limited, when you subscribe, you can watch anything they offer. What Amazon does is, in my opinion, tantamount to bait and switch. Unless you select a program marked as "Prime" you will have to pay an additional fee. Two paid shows a night might provide you with a monthly bill northwards of $100 a month. While that may not sound like bait and switch, here's the catch...Say you're watching season 1 of some TV show. You get sucked in and hooked; Season 2 maybe $1.99 an episode or $29.99 for the compete season. And I have come across shows where you will watch all the episodes and the last couple of episodes of the season are not free. To me, that's dirty pool...and frustrating.

    That said, Amazon's biggest hurdle to be a real factor to challenge Netflix's viewership is it's navigation. This factor is almost always neglected on any discussion of Amazon's viability from a financial standpoint. I think it's the company's greatest weakness. Search functionality is horrible. If you want to to a title search on Amazon, the on-screen keyboard is like the old cell phone keypads where you have to sometimes press a button 3 times to get to the proper character. Remember texting before Smartphones? In addition to huge flaw or design laziness, there seems to be no 'intelligent' algorithm when searching for a title. If, for example you wanted to search for the title "Goodfellas" and you type in "Goodfel", your search result will come up null. Really? And, the icons for the movies are extremely difficult to read...even on my 90' set!. I'm not saying Netflix is perfect, but, I have to wonder, has anyone from Amazon actually used their system?

    If Amazon can not create a user friendly environment quickly, it's ultimately not going to work. My family rarely watches broadcast or cable anymore. We pretty much stream Netflix or HBOGo. The Amazon app is bypassed most nights.

  • Report this Comment On December 28, 2013, at 4:46 PM, lagunagreg wrote:

    Oh Please! Analysts always get this wrong. They said Netflix's days were over in 2011 the stock priced dropped so low. I bought a bunch of it at $89 and am laughing at them all the way to the bank.

    There are several aspects of operations that Netflix got down long ago:

    1- Amazon's price point is way too high even with Prime

    2-Their library is far too limited

    3- Their user interface is really clunky and un-user friendly

    4- They're not really interested in taking over the streaming market or they would already have done it

    This is considered serious competition?

  • Report this Comment On December 29, 2013, at 8:08 PM, vulynn wrote:

    I'm member of both Netflix and Amazon Prime. I've been watching Netflix for many years and just join Amazon over a month. I agree with one of review above "Amazon's biggest hurdle to be a real factor to challenge Netflix's viewership is it's navigation". I'm going to drop Amazon member ship soon because its lack of user friendly environment.

  • Report this Comment On January 01, 2014, at 4:13 PM, duuude1 wrote:

    I think we're about to have a lot of fresh meat here:

    http://seekingalpha.com/article/1924011-short-netflix-on-ama...

    Sharpen your canines, we're about to chew on some shorts, assuming anyone follows this :)

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