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Analyst: Amazon ‘Prime’ Will Affect Netflix

23 Feb, 2011 By: Erik Gruenwedel

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Following Amazon’s subtle launch of its Prime video streaming service, pundits largely considered the prospective competitor a mild irritant to Netflix’s dominant subscription video-on-demand platform.

That is except Frost & Sullivan analyst Dan Rayburn, who believes Amazon’s deep pockets and runaway success in e-commerce make it a formidable challenger to Netflix streaming in the long-term.

Amazon Feb. 22 said it will offer unlimited streaming of about 5,000 titles for free to Prime subscribers (annual membership costs $79). While Amazon hasn’t disclosed the number of Prime subs it has, Rayburn said that if 60% of projections are correct, Amazon generates about $475 million annually in sub revenue.

Amazon’s Prime membership program includes unlimited free two-day shipping, and one-day shipping for $3.99 per item with no minimum order size.

Rayburn said that should Amazon add 5 million subs to its Prime service with the availability of video streaming, it could end the year with 10 million members and generate about $1 billion in revenue that could easily be used toward content licensing.

“That’s a lot of money they can then use to license content, and Amazon would very quickly be at half of Netflix’s subscriber count,” Rayburn wrote in an online post.

The analyst said the “prime” selling point behind a Prime membership has always been free shipping — and adding free movie streams is just icing on the cake. Indeed, Rayburn said the typical Prime member buys four times the number of products from Amazon than a non-Prime member.

In effect, Amazon is treating streaming as a loss leader to attract new members — something Netflix streaming has done for years with the online disc rental pioneer’s packaged media business.

Rayburn said Netflix’s presence on more than 200 consumer electronics devices is significant but not insurmountable. He said Amazon’s transactional video-on-demand service is already on multiple third-party devices, including TiVo, Roku, and Western Digital, among others.

In addition, Netflix uses Amazon’s Web Services for much of its video trans-coding and Web hosting — challenges Rayburn said Netflix alluded to in a regulatory filing.

“While the retail side of Amazon may compete with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service,” Netflix wrote in a filing.

Also, Amazon uses Tempe, Ariz.-based Limelight Networks content distribution network, or CDN, for its video distribution — the same CDN used by Netflix, Rayburn said. The analyst said Amazon could switch to its proprietary CloudFront CDN and save significantly (estimated $50 million) in streaming operation costs compared to Netflix.

Finally, Rayburn said Amazon possesses the multiplatform distribution channels studios covet: Physical sellthrough and digital rental. The fact it could co-mingle platforms to satisfy studios adds another feather in the ecommerce behemoth’s hat. Netflix, other than physical rental, offers no sellthrough option.

“The thing about Amazon that I think most people miss is that they own the entire ecosystem of distribution for video, something Netflix can't do,” Rayburn wrote. “Amazon still has a long way to go before their Instant Video streaming offering is considered on par with Netflix, but anyone who thinks it is going to take Amazon years to compete with Netflix is truly underestimating the company.”

Investors took notice of Amazon's foray into streaming, sending Netflix stock down more than $10 per share to close Feb. 23 at $211.20. Indeed, Netflix has lost about $2 billion in valuation since Valentine's Day. 
 


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