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Xbox and Yahoo! Are Making Their Own Online TV Shows -- Should Netflix and Amazon Investors Panic?

Kevin Spacey as hyperambitious politician Frank Underwood. Image source: Netflix.

It's no secret that content is king. Without quality content, it's impossible to run a profitable entertainment business -- no matter how great the supporting technology might be. Exclusive films and shows give you a leg up on the competition, and homespun entertainment can really set one movie service apart from the pack.

This is why Netflix (NASDAQ: NFLX  ) is spending hundreds of millions on original shows such as Orange Is the New Black and the award-winning House of Cards. It's why (NASDAQ: AMZN  ) commissioned two slates of pilot episodes in the last two years, hoping to kick-start Amazon Prime's digital movie rentals with a couple of surefire hits. For these established online content wranglers, original content was the logical step -- one necessary to stay relevant.

But how many independent online content services does the market really have room for? That's the billion-dollar question, and it may need an answer quicker than you'd think.

What's going on?
On Monday, Microsoft (NASDAQ: MSFT  ) entered the fray. In a partnership with British TV network Channel 4, Microsoft's Xbox Entertainment Studios cemented a deal to remake the Swedish hit series Real Humans (Äkta Människor). It's a sci-fi drama about mixing humanoid robots into everyday life, and will premiere on the Xbox platform in 2015. Channel 4 will also run the show for its terrestrial and cable viewers, but Xbox becomes the exclusive online home of the series, renamed Humans.

Humans or robots? You tell me! Image source: SVT.

It's not Xbox Entertainment's first series announcement, but the first to move out of pre-production limbo and score a release date -- or at least a release year.

Elsewhere, Internet powerhouse Yahoo! (NASDAQ: YHOO  )  is making its own move into original content. According to a blog article from The Wall Street Journal and its anonymous insider sources, Yahoo! hopes to follow in the footsteps of Netflix and Amazon.

It's unclear whether the company wants to ramp up its own video streaming operations or simply act as a clearinghouse where other video publishers can license access to Yahoo's purportedly high-quality content productions. My money would be on the former option. Hollywood already has enough pure-play content producers, after all.

So what's wrong with a little competition?
I'm all for putting top-notch screenwriters, directors, and actors to work. But I'm not at all sure that this proliferation of online video platforms is healthy.

The big promise of Netflix or Amazon Prime is that consumers can turn to them for access to large amounts of high-quality programming. They are one-stop shops for entertainment addicts. Tired of channel surfing? Just go to one of these huge libraries and find plenty of your favorite movies and shows, all in one place, cataloged and searchable for easy consumption.

Competition is healthy, and consumer choice is a good thing. But what happens if the proliferation of online video platforms -- each with its own slate of exclusive content -- goes too far?

That's when the notion of "healthy competition" breaks down. Faced with a plethora of seemingly equal choices, the one-stop shopping shifts into reverse. Where will we turn to find a single point of contact that puts Netflix together with Amazon Prime, Hulu, Xbox, Yahoo!, and all the other top-shelf libraries?

What's next, then?
The way I see it, this can end in three distinct ways:

  • Some of the brand-new content producers fail to find traction. Forced to bow out, they'll leave a much smaller collection of true winners standing.

  • Like any newfangled market growing into its breeches, online video might enter a big wave of consolidation. It's a twofold trend, since content creators and publishing platforms both could become ripe for mergers separately from one another. Again, we'd end up with a handful of big winners.

  • Or a large number of stiff-necked competitors refuse to settle for second place, forcing a completely different kind of sector revolution. In this scenario, the big winner would be the company that figures out how to stitch the profusion of choices into one easy-to-manage consumer storefront. And if that never happens, a whole new paradigm for consumer entertainment could rise up to swallow the entire market we see today.

In the first two alternatives, I'm convinced that Amazon and Netflix will continue to run ahead of the pack. The first-mover advantage has built brand loyalty that few rivals can hope to match, even in the long run.

Personally, I see Netflix outlasting most rivals and focusing tighter than Amazon, which is why Netflix is the largest holding in my investment portfolio. But I'm also hedging my bets in case the third scenario rears its ugly head. So I own a much smaller stake in TiVo (NASDAQ: TIVO  ) as well.

Why TiVo?
TiVo is by no means the only content management specialist on the table, or the only company that could present a unified platform for consuming all of the online video providers.

But it does have a wealth of experience at doing exactly this, and it's the Switzerland of online video -- as neutral as they come. TiVo isn't asking anyone to declare allegiance to Netflix, or to your favorite cable channel, or anything else. That alliance-free business model can be an advantage.

Either way, I don't see how this adventure can end well for Microsoft or Yahoo! They are just a little too late to the party. Anything is possible, but Xbox or Yahoo! would need more than a small miracle to gain a foothold in this market.

Do you see online video creating a wealth of original content, or heading for an inevitable market meltdown with way too many choices? The comments box below is waiting for your two cents.

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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 April 07, 2014, at 5:06 PM, Canhe wrote:

    As an independent maker of comedy trying to get noticed, having more avenues can only be a good thing. Yahoo/xbox can succeed I believe, if they get organised to foster creatives and sponsor new production. In fact they may have an advantage in that they can take more risks on production choice than big players.

    In terms of the big winner, I would go along with theory #3, one day an independent content aggregator will win the day. A well-crafted payment and deployment system would be key though - such as an expanded version of ultraviolet.

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Anders Bylund

Anders Bylund is a Foolish Technology and Entertainment Specialist. Where the two markets intersect, you'll find his wheelhouse. He has been an official Fool since 2006 but a jester all his life.

Hypoallergenic. Contains six flavors not found in nature. Believes in coyotes and time as an abstract.

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