On Nov. 15, Amazon.com (NASDAQ:AMZN) will launch its first attempt at original programming with a new T.V. series called Alpha House, a political comedy starring John Goodman. Amazon is one of the most innovative and disruptive companies around, but that doesn't mean that investors in Netflix (NASDAQ:NFLX) should fear the online retailer's venture into original content.
Alpha House vs. House of Cards
It's easy to find similarities between Alpha House and House of Cards: Both series are original productions by online streaming companies and they are also centered in the world of politics. On the other hand, the differences are worth considering too.
Both companies are leveraging big data and proprietary technologies in their attempts to deliver what viewers want, but they are choosing different methods.
Netflix capitalizes on its enormous user base to analyze viewing habits and pinpoint popular shows: Kevin Spacey and director David Fincher are quite popular among Netflix subscribers, and so is the British version of House of Cards. Combining these data points, Netflix had good reasons to anticipate that its version of the show was going to be a success.
Amazon, on the other hand, released 14 different pilots available for broad public viewing and rating to create a gigantic focus group. Based on data from responses and reactions to these pilots, the company then decided to produce five series, including both Alpha House and an upcoming comedy about a start-up in Silicon Valley called Beta.
The process sounds reasonable and certainly more participative than the inefficient pilot process traditionally used by big networks. However, unlike Netflix, Amazon has not yet proven its ability to effectively leverage its data and technologies to effectively deliver what viewers want.
In addition, Amazon will release the first three episodes of Alpha House for free on Friday, with the rest of them coming on a weekly basis and available only to subscribers to Amazon Prime via Prime Instant Video.
This may have some advantages for Amazon, like refreshing the "water cooler effect" by fostering conversation about the series, as viewers don't have the typical Netflix problem of not knowing which episodes the other person has already watched.
But Netflix has already become enormously popular with its domestic streaming audience of more than 31.1 million and its more than 40 million global subscribers. All those viewers are getting accustomed to having access to all the episodes of a show from the start, watching what they want, where they want, and when they want it. This will likely remain a key differentiating factor for Netflix.
A different game
Considering Amazon's innovative drive and the company's track record of success, it wouldn't be a huge surprise to see Amazon doing well in original content. But investors still need to consider that Amazon and Netflix have different business models and their own strategic priorities.
For Amazon, programming is an additional benefit provided to Prime members. For $79 per year, Prime members get free two-day shipping and unlimited access to Amazon Prime Instant Video, with more than 40,000 movies and T.V. episodes, in addition to other benefits like access to the Kindle Owners' Lending Library.
By adding original content to its library, Amazon increases the attractiveness of its Prime membership, and this promotes customer loyalty, spending, and profitability in its online retail operations. Streaming is a means to growing its Prime membership base, not an end to itself.
Netflix, on the other hand, is all about streaming. According to BTIG media analyst Richard Greenfield in a recent interview with CNBC, each Netflix subscriber watches on average 93 minutes per day. This is a remarkable level of engagement that makes Netflix the fifth most-watched TV network behind ABC, CBS, NBC, and Fox.
A Sandvine Internet traffic report discussed on PCMag.com claims that Netflix is the undisputed leader in video streaming in the U.S. by a wide margin. According to this data, Netflix accounts for 31.6% of all peak downstream traffic, followed by YouTube with 18.6%, while competitors like Amazon Video and Hulu come far behind, with 1.6% and 1.3% of downstream traffic, respectively.
Netflix has the first mover advantage, and the company's large user base, internal recommendation software, and proprietary technologies provide an edge when it's deciding which content to acquire or produce in the coming years.
Eroding Netflix's leadership position in streaming will be no easy task at all, not even for a formidable competitor like Amazon.
Just as traditional TV has enough room for different players to succeed, there is no reason to believe online streaming will be a zero-sum game. Besides, Netflix has built a rock-solid leadership position and sustainable competitive advantages, so investors in the company don't need to panic about raising competitive pressure from Amazon.