Can Amazon push Netflix out of limelight?

Amazon CEO Jeff Bezos

(Credit: CBS)

For years, Amazon appeared to be a big pushover when it came to delivering Web entertainment.

During the early part of the Internet Age, Amazon shipped CDs and DVDs to customers who ordered them via the Web and CEO Jeff Bezos' company was synonymous with Web music and movies. Then Apple's iTunes, and Netflix, laid waste to physical discs by delivering digital downloads or streaming video and Amazon seemed to quietly drift to the back of the pack.

But today Amazon flexed some muscle of its own by announcing it would stream movies for free to people who subscribe to the e-tailer's Prime service. Amazon Prime subscribers will be able to log on to the Web from Internet-connected devices to instantly access a pool of 5,000 films and TV shows. For $79 a year, Amazon Prime subscribers receive unlimited free two-day shipping without being required to meet any minimum-purchase requirements.

Plenty of commentators in the blogosphere are noting that Amazon's video service isn't a Netflix killer yet, and they're right--but this is just the merchant's first volley as it prepares to take on Netflix, Apple, and others in the growing streaming media sector.

The imagination runs wild when one considers what Amazon could do if the Web store throws its considerable retailing and financial girth into marketing a streaming-video service. Consider that Amazon must pay the film studios and TV networks for the rights to offer the streaming video, but so what? Amazon has loads of cash. The company reported $3.7 billion of cash and cash equivalents for the 12 months ended December 31, 2010. With a snap of their fingers, the Amazonians now offer an unbeatable subscription price.
Amazon can keep ads in front of the 65 million online shoppers that visit the company's site each month. The video service could be promoted and bundled with all kinds of other product offerings. Dan Rayburn, an analyst covering Web video for consulting firm Frost and Sullivan, said Amazon could conceivably sweeten its offer by selling deeply discounted set-top boxes that enable Prime subscribers to watch streaming video on their living-room TV sets.

Heck, Amazon's deep pockets might allow the company to give those boxes away.

Another advantage Amazon has over Netflix is that the company has the horsepower to stream its own video to Prime members without having to pay a third party. Netflix can't say this. On the contrary, the company overseeing that chore for Netflix is Amazon's Web Services (AWS). That's right, Netflix is dependent on a rival for some of its back-end operations. But as full of potential intrigue as that sounds, it's doubtful Amazon would ever undermine AWS' reputation by torpedoing Netflix that way.

Wall Street apparently believes Amazon could cause Netflix some hurt. Netflix's stock tumbled more than $13, or 5 percent, in afternoon trading. Netflix shares have risen steadily over the past year and the stock posted an all-time high last week when it topped $247.

Investors should factor in that Amazon is not likely to unseat Netflix anytime in the near future. Netflix has more than 20 million subscribers, a far larger selection of films and TV shows than Amazon, and has already shown that it can outmaneuver larger players. Experts once thought Blockbuster, the brick-and-mortar video-rental chain, would smash Netflix. The opposite happened. While Blockbuster was still charging late fees and engendering a deep well of consumer bitterness, Netflix was delivering videos to customers' doors via the U.S. Postal Service--creating an entirely new delivery model--and telling users to hang on to the DVDs as long as they liked without charge.

"A growing market attracts competitors," said Netflix representative Steve Swasey.

While Amazon has several businesses to distract management's attention, Netflix thinks exclusively about delivering movies and TV shows. The company has posted a team of dealmakers in Hollywood so they can insert the company into the studios' future plans. Netflix has deals with such content suppliers as Warner Bros. Pictures, Relativity, Starz, and Epix, and just today it added TV shows from CBS, parent company of CNET.
And consumers are already streaming video from Netflix via more than 200 different kinds of Internet-connected devices, such as video-game consoles and Web-enabled TVs, which are compatible with the service. Even if Amazon did offer a Roku-like box for free, it would likely take the company a while to cut enough of the deals to make itself as widely available as Netflix.

The real loser could be Hulu, the joint venture operated by Disney, NBC Universal, and News Corp. that has recently suffered from internal strife. Hulu offers some content for free but the service requires users to pay $7.99 to access a growing number of shows. In addition, Hulu's pay service also forces viewers to watch ads. Amazon's new video service is ad free.

Regardless of which company takes over, with all the price cutting and scrambling to add programming, the real winner--for the time being at least--will be consumers.