At the beginning of the year, Netflix (NASDAQ:NFLX) announced a sudden global expansion. In one fell swoop, the streaming video on demand (SVOD) service went live in more than 130 new countries. With a few exceptions, Netflix is now available everywhere in the world.
But Amazon.com (NASDAQ:AMZN) has plans of its own. With the premiere of its new series, The Grand Tour, Netflix plans to roll out its Prime Instant Video service, in at least some form, to over 200 countries and territories in December.
The service is currently available in only a handful of countries, but Amazon said in a recent press release that The Grand Tour "will premiere worldwide for Amazon customers in over 200 countries and territories in December."
Instant Video is often used as a way to get customers to sign up for Prime, Amazon's loyalty program with unlimited two-day shipping. But Prime's limited geographic availability may mean Amazon is looking to start generating profits from its SVOD service directly.
Taking on Netflix's giant content budget
If any company has the capabilities of taking on Netflix, it's Amazon. Netflix currently spends about twice as much as Amazon on its content catalog, which includes both original productions and licensed content. Netflix expects to spend $6 billion in 2017.
Amazon doesn't release the details of its streaming-video content spend, but estimates range from $2 billion to $3 billion last year. CFO Brian Olsavsky said the company is doubling its content spend in the second half of 2016 compared with last year, so it might be spending between $3 billion and $4 billion this year. That's still well short of Netflix's content spend.
Still, acquiring global rights for shows can be difficult. Amazon has reportedly sought out global rights to select series since the beginning of the year, according to Bloomberg. One way Amazon can overcome that barrier is to produce new shows itself. That's what Netflix has done. Amazon plans to triple the number of new original shows that premiere in the second half of 2016 compared with the second half of last year.
The good news is that Amazon has a huge amount of cash to fund its expansion. The e-commerce giant has over $18 billion on its balance sheet, with about $8 billion in long-term debt.
Netflix, meanwhile, is relying heavily on debt to fund its expansion. It currently has about $1.3 billion in cash and $2.4 billion in debt.
Amazon's cash position means it can buy whatever it thinks it needs to succeed internationally.
Can Amazon make money directly from Instant Video?
Amazon has never had any pressure to generate a profit directly from Instant Video because it served to support Prime. Not only do a higher percentage of Prime trial members who use Instant Video sign up for a full year than those who don't, but members who use it throughout the year are more likely to renew. With Prime members spending around twice as much as non-members, Amazon can afford to lose money on Instant Video to support the rest of Prime.
Amazon has already taken steps to move Instant Video into a stand-alone service. Customers can sign up for just video streaming for $8.99 per month. That price still undercuts Netflix's $10 per month, but it represents a slight price increase compared with Prime's regular $99-per-year service. The pricing reflects two concerns: that Instant Video on its own is a loss leader for Prime, and that churn could be a much bigger factor for the monthly subscription.
Netflix's huge international expansion this year ensured that the segment remained unprofitable as it invests in new markets. On the other hand, more mature international markets such as Latin America are already profitable, as of the end of 2014. Netflix results indicate that both it and Amazon could make a profit in new international markets as well.
It's still early days for Netflix in the majority of its international markets. If Amazon moves quickly and invests heavily in new content rights, it could make a profit at the expense of Netflix.
Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. 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.