A few days ago, The Wall Street Journal published a report stating that Amazon.com (NASDAQ: AMZN ) may be considering releasing an advertising-supported streaming television and music video service. The service would allow Amazon, which sells its Prime membership for $99 per year and offers free two-day shipping and streaming of selected movies and TV shows, to improve competitiviness against competitors such as Netflix (NASDAQ: NFLX ) in the fierce on-demand Internet streaming space.
The online retailer quickly denied the rumors, stating it has no plans to offer a free streaming media service. However, a free streaming service provided by one of largest tech companies in the world, such as Amazon, could disrupt a market that is largely dominated by Netflix. Amazon has various incentives to release its own free streaming service, as these services are expected to replace traditional television within this decade. Will Amazon eventually release a free video streaming service?
According to the Wall Street Journal, Amazon.com was considering an advertising-supported streaming service that was expected to launch in the coming months, featuring original and licensed content, plus free music videos. Strategically placed advertising on Amazon's retail website was also a reported consideration.
The possible benefits
The move could help Amazon benefit enormously from the promising industry of online advertising. As TV gets replaced by streaming services, marketers are expected to shift more money to companies such as Google's YouTube or even Netflix. According to eMarketer, TV advertising is forecasted to generate as much as $68.5 billion in the U.S. this year.
The strategy could also help Amazon improve its competitiveness in the streaming space. The company is, by far, the king of e-commerce in the U.S., but it is still far from beating Netflix in the streaming space, despite investing roughly $1 billion to acquire and also develop its own original content. In its most recent quarter, Netflix added more than 2.3 million U.S. customers.
It's worth noting that if Amazon was to release a free streaming service, the move could hurt Amazon Prime. At the moment, users are motivated to join Amazon Prime not only to gain access to shipping deals, but also to enjoy thousands of movies and TV shows. Unless there's strong differentiation between Amazon Prime and a possible ad-supported, free streaming service, several Amazon Prime's customers would replace the paid version for the free one. This shift will not only hurt Amazon Prime, but it could contribute to a decrease in top-line related to Amazon's e-commerce service, as Amazon Prime customers tend to order more products to take advantage of special shipping deals.
Improving the competitiveness of Amazon Prime
Amazon wants to improve the competitiveness of Prime to capture Netflix's market share. However, releasing a free streaming service is not the solution, as this is a potential substitute to Amazon Prime service. Instead, the company could release complementary services, or improve Amazon Prime's differentiation by creating its own content.
As Fool contributor Joseph Gacinga points out, introducing a tiered pricing system for Amazon Prime could also be beneficial. At the moment, Amazon charges a fixed $99 fee, which is a great discount for high-volume shoppers. However, the story is completely different for low-volume shoppers.
A hybrid model
Amazon could also adopt a hybrid model, a combination between the current version of Amazon Prime and a completely ad-supported, free streaming service. To gain price-sensitive customers, the company could experiment with reducing the membership cost of Amazon Prime in exchange for in-stream advertising. Note that Amazon has used this model in the past. The Kindle, "with special offers" edition offered customers a discounted price on the hardware in exchange for advertising on Kindle's home screen.
Final Foolish takeaway
Most likely, Amazon will not release a free streaming service, as this is a potential substitute service to Amazon Prime. Instead, the company could adopt a different strategy, one that involves improving the competitiveness of Amazon Prime by creating original content, releasing complementary services, or changing the pricing system. The adoption of a hybrid model, which allows price-sensitive customers to enjoy a lower membership fee in exchange for watching ads, is also worth considering.
Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.