The deal, announced today, will allow Amazon Prime Instant Video subscribers access to movies from Epix studio partners - Viacom Inc.'s (NYSE:VIA) Paramount Pictures, Metro-Goldwyn-Mayer Pictures, and Lions Gate Entertainment Corp. This announcement came only a few days after Amazon announced a deal with NBC to stream its content on Prime.
Amazon did not disclose the terms of the deal, but the company is "investing hundreds of millions of dollars to expand the Prime Instant Video library," Bill Carr, vice president of video and music at Amazon, said in a statement.
Netflix has been paying Epix $200 million per year since 2010 for the exclusive rights to stream movies to U.S. customers. Netflix'sexclusive deal expires in September.
The reason why this deal will significantly lose Netflix customers, is because Amazon can undercut Neflix in pricing and have more of a video selection than Netflix. Amazon can do this because streaming videos are just a portion of the service given to Amazon Prime customers. Amazon will be willing take a hit in profits on streaming video just to get more loyal Prime customers.
However, practically Netfilx's whole business is streaming movies and shows. The company needs to make a profit in this business, while Amazon doesn't have to.
Netflix's historical decline has been sad and surprising for many people. In the beginning, Netflix had started a new standard for how people watch movies and shows. However, for Netflix to continue to thrive, it had to be run very tightly and consistently grow its content. It would have to undercut its competition through volume. It is clear now that Netflix doesn't have the resources to do this, but big companies like Amazon, Apple (NASDAQ:AAPL) and Verizon (NYSE:VZ) do. Earlier this year, Netflix's contract with Starz ended. Netflix didn't want to pay the increased costs for its content. If Netflix won't pay it, then other video streaming services, like possibly Amazon, will.
Amazon Prime has plenty of room to grow and gain subscribers. At the moment, it isn't an option to watch Amazon Prime on most TVs. People are just starting to talk about and recommend it. As more people talk about Amazon Prime's great new content, more customers will leave Netflix to move over to Amazon Prime.
If there is anyone to blame for Netflix'sdecline, it would be its CEO, Reed Hastings. He was overly optimistic and cocky about his company. He believed it had a significant barrier to entry.
At the height of his over-exuberance, in 2011, he had Netflix buy back $200 million worth of shares at an average price of $222. The company could've used that money to acquire more streaming videos and expand to other countries instead of buying back stock when it was at its peak. Now for the company to expand, it must raise capital. In November, 2011, it raised $400 million in cash by issuing stock and convertible bonds.
He had grand dreams for how big Netflix would eventually become. Those dreams need to be set to the side at this point and Netflix just needs to figure out how to survive. There are other avenues it can take aside from streaming video. It could just play obscure movies and specialize in specific genres that its competitors wouldn't have. It could also mostly focus on its own content, which it is already doing.
It would be quite a transition for Netflix to change from a company doing streaming videos of popular movies and shows, to one of just doing mainly its own content. This would require, in effect, revamping the whole company. This kind of transition will require the company to take losses for an extended period of time, which would likely require more capital raises. I believe there isn't much upside at this point for NFLX and the stock could easily halve in value or more in the next year, even at its current lows.
Disclosure: I am short NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.