Amazon (NASDAQ:AMZN) Prime Instant Video has always been an exclusive perk for members of the company's $99 a year Prime service. However, the company is now considering an ad-supported version of the streaming service that would be available to anyone, The New York Post reported.
If that happens, Amazon would pose a threat to established streaming video leader, Netflix (NASDAQ:NFLX), which charges new customers $9.99 a month for access.
"If they do an ad-supported service, they will decouple it from Prime and that is a Netflix killer," Wedbush Securities analyst Michael Pachter told The Post. "It won't be $99 a year."
Pachter has a point, but he's probably overstating what will actually happen.
What is Prime Instant Video?
Since its launch in early 2011, Prime Instant Video has been a free service for Prime members, created to add value to the $99 annual membership. If Netflix is the gold standard for streaming video services, then Prime Instant video comes in at a solid bronze. The Amazon offering has a competitive selection of television shows and movies, including some HBO programs otherwise only available on HBO Go. Prime Instant Video also has original series, including Transparent, which has received some critical acclaim.
However, the service falls short of what Netflix has to offer, namely a larger content library as well as a number of hit shows, including House of Cards and Orange Is the New Black. Netflix has also announced plans to make feature films starting with a sequel to Crouching Tiger, Hidden Dragon and a new take on the talk show, starring Chelsea Handler.
Netflix spent approximately $3 billion on content in 2014, according to the company's 2013 annual report, while Amazon spent between $1.5 and $2 billion, according to an estimate from The Wall Street Journal.
Though second to Netflix, Prime Instant Video could certainly appeal to a broad audience were it to become a free ad-supported service.
Building an audience
Netflix had 37.2 million domestic customers at the end of the third quarter and another 15.8 million globally. While Amazon does not disclose the number of Prime customers it has, The Post estimated membership at around 50 million with half of those using the free video service.
"Amazon Instant Video is now the second largest paid streaming video service in North America, accounting for 2.6% of downstream traffic," according to Sandvine's twice yearly Global Internet phenomena report. "Service is growing, as its share of traffic more than doubled in the last 18 months."
While the Amazon service grows, Netflix still dominates the segment, accounting for 34.9% of downstream traffic in peak evening hours in North America. A free, ad-supported version of Prime Instant Video would certainly cut into that difference, especially with Amazon's ability to promote the service to its 244 million plus customers and on its homepage, which Alexa ranks as the third most popular page in the United States.
A Netflix killer?
A free, ad-supported Prime Instant Video would almost certainly cut into Netflix's user base and make it less attractive to potential subscribers, at least among certain audiences.
"Who wouldn't switch if you were poor or you're a cord-cutter?" Pachter told The Post.
Though free Prime Instant Video may be a drag on Netflix, that doesn't automatically make it a Netflix killer. Yes, cash-strapped cord-cutters may opt for a free service over $9.99 monthly charges, but a large number of Netflix users are likely loyal to the service due to specific programming. HBO has long maintained its subscriber base by having a few must-watch shows on top of its overall content package. Likewise, Netflix has not killed HBO, which saw it subscription revenue grow by 10% for Time Warner's most recent quarter.
It seems likely that if Netflix continues to produce strong content -- something it has excelled at, much like HBO -- then it will continue to grow. There's room for more than one successful video service and exclusive, high-quality shows and movies have made Netflix more appealing than ever.
Ultimately, this another case where increased competition between service offerings is resulting in even better options for consumers.
Daniel Kline has no position in any stocks mentioned. He is a Netflix subscriber and a Prime member but rarely remembers to use either service for video. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of 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.