Increased Competition Will Likely Increase Content Costs For Netflix

Earlier today, Amazon.com announced that they will be offering their Amazon Prime video streaming product as a separate service. Up until this point, the only way to access Amazon's streaming video was to subscribe to the Amazon Prime service, which costs $99/year.

Amazon's new standalone service will cost $8.99/month, $1 less than what a standard membership costs for Netflix. Amazon's announcement comes just a few weeks before many Netflix members will see their membership costs increased by $2/month to $9.99.

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Many people have pointed out that the Amazon.com video streaming service is vastly inferior to Netflix, both in terms of useability and content. After all, Netflix has invested heavily in original content over the past couple of years, producing gems such as "House of Cards" and "Orange is the New Black". This content, Netflix bulls argue, is the moat that will protect Netflix's membership numbers.

Amazon bulls/Netflix bears, however, argue that Amazon.com will undoubtedly look to vastly improve their streaming video product now that it is available as a standalone service. Amazon.com invests heavily in any new initiative that they undertake (see their rapid growth in cloud computing) and it stands to reason that they will look to invest heavily in original content.

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How does this development impact Netflix going forward?

To start, it stands to reason that Netflix's content costs will increase, as the deep-pocketed Amazon.com will presumably be bidding for the same shows and movies as Netflix. This is great for content producers as these two companies will likely get into bidding wars over highly regarded projects.

In addition, if Amazon manages to poach even a small amount of Netflix's current subscribers, Netflix will have a harder time meeting their aggressive subscriber projections. This will presumably prove to be a drag on Netflix's bottom line and share price. Sure, many people will have Netflix and Amazon streaming accounts, though many people will choose just one.

One last point - Amazon will likely aggressively price their product, which should cause Netflix to pump the brakes on any future price increases of their own offering.

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Amazon.com isn't entering the standalone video streaming market to be the #2 player. Don't look at the current state of their product and think that they won't stand a chance against Netflix - this is Amazon that we are talking about, and they won't be happy until they are destroying their competition.

Filed under: General Knowledge