The content wars are starting to kick into high gear and the ultimate winner will very likely be the one with the deeper pockets, Amazon.com Inc. (AMZN). While Netflix, Inc. (NFLX) is putting up a good fight, it may doomed to the same fate it bestowed on Blockbuster.
We have written about Netflix in the article "Is Netflix Going to $300?" and then expanded upon that piece with a follow-up titled "Netflix Content Key To Stock Moving To $300." It is rather amazing how quickly things can change in a few short weeks. Part of the reason for our lofty target was the momentum from Wall Street. However, as of now it seems Google Inc. (GOOG) is attracting the momentum crowd. News this past week that retail behemoth Amazon is now entering the content creation market should send shock waves through the minds and hearts of Netflix longs. As a user of both services, I must say that the Amazon video service interface sucks. There is no better word for it. It is rather surprising that Amazon, the pioneer and leader of internet retail has not come up with a better, more user friendly interface yet. While it can be argued that its focus is on building its content library over the last couple of years, that excuse won't fly as more and more users look to try the service.
Amazon Prime, under which its streaming service falls, is priced at $79 per year or a little over $6.50 a month. However, included in this service is not just free access to the Amazon Prime free video library, but also free two-day delivery on all purchases made through the site. Another benefit that many are unaware of is that the Amazon Prime membership also lets you share your free shipping benefit with up to four family members. When you step back and look at the offering as a whole, it is a wonderful service and one I can say I have been using since its inception. For a higher price from Netflix you get streaming movies. That's it!
Now, of course, the reason behind the Amazon Prime service is to build loyalty with its users. If you have free two day shipping you are more inclined to shop with that retailer. I know I do. You have to hand it to Amazon it's a great idea that other sites are copying now, albeit a tad too late. It is also the reason for Amazon essentially selling its Kindle Fire for a loss. Your product in front of potential users and your sales will increase. It is also a very strong reason Amazon is pushing into streaming video ever more. Amazon is loaded with cash and is a giant in retailing. Put those two together and you have a large negotiation tool when it comes to content providers. Netflix has seen its cost to acquire content over the last couple of years explode, and now has over $5 billion in content liabilities on its balance sheet. This is no small amount and one that needs to be constantly replenished, each time for a higher price.
Netflix put Blockbuster out of business; how long until Amazon puts Netflix out of business? In out last article, we discussed the importance of Netflix trying to create its own content to both control costs and to attract new subscribers. Amazon has now joined in the content creation wars. This past week saw Amazon announce that it is going to start filling its own shows for its Prime service.
Of concern to investors should be news that "Netflix has been ordering entire seasons of its shows without seeing pilots first." This seems to be a tremendous risk. House of Cards appears to be a huge success but that luck may be unlikely to continue. Amazon is taking the best and smartest approach. Order multiple pilots, give them network budgets and then show the pilots to its Prime members for feedback. The company will quickly learn the winners and let viewers feel like they are part of the experience of choosing shows. Viewer loyalty is a big part of success in shows. Amazon has not disclosed how much money it is investing in original video production, but some media experts estimate it likely will cost more than $10 million to produce the pilots. It will pick the shows to develop into full seasons based on the feedback it receives about the pilots, which will be posted online.
Roughly half the pilots Amazon is shooting are comedies and half are kids shows. They include "Browsers," a musical comedy starring Emmy and Tony winner Bebe Neuwirth, and "The Onion Presents: The News," based on the satirical news service. The first offering is a series with some big time cameos from Hollywood stars, Alpha House. Amazon is also filming a pilot for Zombieland. A 30-minute pilot version through Sony Pictures is going to go into production in metro Atlanta for Amazon's streaming service. It is being re-cast with new actors, with two already named.
Netflix has been unable to breach the $200 per share mark over the last month and the chart is looking ready for a retrace that investors may not like. A retrace to the 50 day moving average at $1.45 could be seen quickly on a break of $175. Ultimately, Netflix may suffer the same fate as Blockbuster, trading for pennies and going bankrupt. It will all depend on how long the market will fund its content appetite and how large its debt grows as a result. It was its large debt load that eventually took Blockbuster out. Netflix now has $5B in liabilities on its balance sheet and the content wars are only starting. Amazon seems intent on making streaming an integral portion of its business. That is very bad news for Netflix.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.