Amazon vs. Netflix: The Battle for Content Has Begun

Includes: AMZN, NFLX
by: Derastone

Amazon (NASDAQ:AMZN) could certainly disrupt Netflix's (NASDAQ:NFLX) model, but it will not make it irrelevant. The industry is consolidating and higher content prices have definitively made it hard for start-ups to get into the movie streaming business a la Netflix style. These barriers to entry are creeping up to a point where there will be only a handful of corporations with pockets deep enough to compete in the long term.

Netflix certainly has the first-mover advantage, but competitively I see AMZN taking the lead and here is why (from Business Insider):

That's an interesting statement from Netflix and while they are talking about a technical advantage, Amazon already has a competitive advantage over Netflix when it comes to cost since Amazon owns the infrastructure that Netflix is leasing from them. And at some point, Amazon will most definitely use CloudFront to deliver their videos and move away from using third party CDNs. That's another cost advantage Amazon will have over Netflix, who is estimated to spend more than $50M this year just in video delivery across third party CDNs. has the deep pockets necessary to license content, a variable business model (watch immediately, rent digitally), and infrastructure capabilities to out-compete Netflix. However, there is room for multiple players in this growing industry and there is room for still making money in both companies.

The key is to secure content at the right price and everything else will take care of itself. However, the price a company can pay depends on the costs to run the business. Amazon seems to have the long-term advantage in that respect.

Content Licensing News

CBS (NYSE:CBS) and Netflix announced a two-year, non-exclusive licensing agreement that will allow select TV shows from CBS's library, including episodes of "Medium" and "Flashpoint" as well as full seasons of classics such as "Frasier," and "Cheers," to be streamed instantly from Netflix. CBS retains an option to extend the agreement for up to two additional years. Terms of the deal were not disclosed.

With the CBS deal Netflix becomes the only online entertainment service to offer content from all four major broadcast networks. Hulu comes close with Fox (NASDAQ:NWS), NBC (NYSE:GE), and ABC (NYSE:DIS) on the service, but CBS still is holding out.

YouTube (NASDAQ:GOOG) is in talks with the NBA and the NHL to broadcast live games, according to an interview with Gautam Anand, Google's director of content partnerships for Asia Pacific. GOOG has declined to give additional details of the negotiations.

Disclosure: I am long AMZN, NFLX.