On Friday, Amazon (AMZN) took another shot at Netflix (NFLX) in the streaming video war. If the previous sentence sounds familiar, especially coming from me, it should be. This is the latest in a string of moves Amazon has made to bolster its Prime Instant Video service, an increasingly strong competitor to Netflix. Unfortunately, as I'll describe throughout this article, this news is most likely negative for the financials of each name, which means it adds to the short case for each stock.
The most recent announcement:
On Friday, Amazon announced an agreement with A&E Networks that will provide even more content to Amazon's growing library. A couple of key items from the deal are listed below.
The deal will add prior seasons of popular series from A&E, bio, HISTORY and Lifetime to the Prime Instant Video service.
The deal with A+E Networks will bring Prime customers more TV episodes from some of their highest rated television programming including Pawn Stars, Storage Wars and Dance Moms, which are also available for purchase through Amazon Instant Video.
According to Amazon, Prime Instant Video now features more than 33,000 movies and TV episodes for Amazon Prime members to stream instantly, at no additional cost. While we don't know how many titles Netflix has, there have been estimates for more than 60,000. So while Amazon doesn't seem like an equal competitor here, you must consider the following. When I wrote about Amazon back on March 15th, Amazon had just 17,000 titles available. At that point, Amazon had added 12,000 titles since the Prime Instant Video launch in 2011. So in less than two years, Amazon has gone from about 5,000 titles to 33,000 titles. That is a huge amount of growth in its content library.
Netflix and their loss:
The biggest part of this deal may not be that Amazon picked up the content. It's the fact that Netflix dropped this content a few months ago. Netflix was not able to come to terms on a new agreement, and thus dropped the content. Netflix has become extremely selective with its content purchases lately after making so many commitments over the past few years. With Netflix's profits plunging and cash flow stagnant, the company has decided to hold off a bit on purchases until its financial condition improves a bit. Netflix has also decided to focus on producing its own original content, instead of purchasing content from other providers.
This isn't the first time Amazon has taken advantage of Netflix's penny pinching. A few months ago, Amazon signed a deal to get content from Epix, over 2,000 titles. Netflix had an exclusive deal with Epix, but when the exclusivity period ended, a new deal was not agreed on. Netflix let exclusivity go, and that has allowed others to pick up the Epix content. The Redbox Instant service, about to go live, from Coinstar (CSTR) and Verizon (VZ), picked up the Epix content recently as well. Redbox Instant is currently in beta testing, and should go live very soon. It's just another competitor to add to this space.
Netflix still has the Epix content, but the deal between the two expires this year. It will be interesting to see if the two come to an agreement. If Netflix truly is concerned about lowering its content commitments, it might let Epix go. That would be just another in the long string of content Netflix has dropped. Eventually, subscribers will start dropping at a similar pace.
The financial impact:
While Amazon has done a great job of building a strong content library, that does come at a price. As I recently detailed in another Amazon content article, content is expensive, and the added players in this space are pushing up prices even more. Now we don't know the exact dollar amounts of these contracts for content, but we know they are rising. If they weren't, Netflix would keep renewing their old deals. Also, Netflix CEO Reed Hastings has stated that he believes Amazon is losing up to a billion dollars on Prime.
When you add in the large content purchases plus the rest of what Amazon is doing, the expenses are piling up. Despite revenues being forecasted to rise by 29% in 2012, current estimates call for Amazon to swing from a $1.37 profit to a $0.03 loss. Revenues are forecasted to jump by $14 billion, and not only do analysts expect Amazon's profits to come down, they expect Amazon to actually lose money!
Amazon took another shot at Netflix by adding more content. The Netflix punching bag took another hit. These occurrences are becoming more and more common. Some might not have considered Prime Instant Video a legitimate competitor to Netflix when it only had 10,000 or 15,000 titles, but now it's at 33,000.
Amazon is gobbling up more and more content, while Netflix is penny pinching and avoiding more purchases. Both are also looking to move to more original programming, which is even more expensive. Last week's news drives home the point yet again. Content is expensive, and as the competition increases, prices will rise further. Amazon is forecasted to lose money this year, and Netflix could too. Neither are very profitable, and probably won't ever be. Eventually, the lack of profits will catch up with both of these names, and they continue to be decent short candidates as we near that eventual point.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.