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Amazon Prime's Growth Isn't a Threat to Netflix by Any Means

By Adam Levy – Updated Apr 20, 2017 at 6:46AM

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Most Prime members also subscribe to Netflix.

Image Source: Amazon.

Amazon (AMZN 1.26%) is doubling its spending on content and tripling its original productions for Prime Instant Video, but that doesn't mean Netflix (NFLX 2.08%) investors should be scared. In fact, Amazon's increased spending may be something of a positive for Netflix.

A recent survey from Cowen & Co. found that 66% of Prime households are also paying for Netflix. That compares to just 39% for non-Prime households. What's more, just 11% of Prime members had canceled their Netflix at some point, compared to 12% for non-members.

Prime and Netflix appear more complementary than competitive, as cord-cutters may use both to replace cable. The influx of new content on Amazon could convince even more people to cut the cord and rely exclusively on streaming options, including both Prime and Netflix.

A look at subscriber growth

Last year, Amazon Prime subscribers grew a whopping 51% year over year. Even in the more saturated U.S. market, membership grew 47%. That follows growth of 53% and 50% globally and domestically, respectively, in 2014. Cowen and Co. estimates there are now about 49 million Prime households in the United States.

Netflix, by comparison, isn't growing nearly as fast, but still has a relatively large subscriber base. Its global subscriber count increased 25% over the past 12 months, closing in on 87 million. Most of that growth is fueled by its international expansion. Domestic subscriber growth was just 10% during the same period. But Netflix has a similar number of domestic subscribers as Prime (47.5 million).

What's more telling is the subscriber growth (or lack thereof) at pay-TV companies. Combined, they've lost 834,000 subscribers over the last 12 months, according to analyst Jan Dawson. While some companies are bouncing back with subscriber growth, the overall trend is that people are leaving the cable bundle for over-the-top services.

Consumers want good value

Amazon Prime is one of the best values in retail and entertainment. Not only do you get the primary benefit of unlimited two-day shipping, you get access to the growing Prime Instant Video catalog, free access to thousands of books through Prime Reading, access to special products on Amazon, and Prime members receive a discount on Amazon's new music streaming service. With the growing investment in entertainment around Prime, it's only becoming a better value.

But Netflix has firmly established itself as one of the best values in a la carte television. Its original series are favored by more people than the critically acclaimed programming from HBO. Barring a significant drop in programming quality, Netflix will remain a staple in consumers' entertainment budgets.

Amazon's investment in originals makes Prime more appealing to consumers. It seems very few would replace their Netflix habit with Amazon, but cable subscribers are more likely to consider replacing their bundles with some sort of Netflix/Amazon hybrid. Considering the average cord-cutter saves around $80 per month not paying for cable, it's not uncommon for households without cable to subscribe to multiple over-the-top services, as the survey results from Cowen & Co. indicate.

The rapid growth of Prime isn't a threat to Netflix. It's a threat to cable companies, which are bleeding subscribers.

Adam Levy owns shares of The Motley Fool owns shares of and recommends and Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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