Amazon Could See A 6% Gain By Late 2012

| About:, Inc. (AMZN) (NASDAQ:AMZN) inked a multiyear licensing deal with the channel Epix, bringing the online marketplace access to a variety of titles from Viacom (NASDAQ:VIAB)'s Paramount Pictures, Lions Gate Entertainment (LGF) and Metro-Goldwyn-Mayer Studios.

"We are investing hundreds of millions of dollars to expand the Prime Instant Video library for our customers. We have now more than doubled this selection of movies and TV episodes to over 25,000 titles in just under a year," said Bill Carr, vice president of video and music at Amazon.

This is just the company's latest move in its aggressive build out of Prime Instant Video. On June 1st, Amazon launched an app for Apple (NASDAQ:AAPL)'s iPad, increasing the number of platforms on which it is available and, in doing so, increasing the value of the service, which is part of Amazon Prime Membership. Since then, the company has formed deals with the likes of ESPN and NBC Universal to the point that the movies and shows available on Amazon Prime are rapidly approaching the same offering that Netflix (NASDAQ:NFLX) provides. It has also expanded its platform availability to include Xbox 360.

Netflix has 30.1 million subscribers, and Epix content represents less than 5% of the content streamed through its service, but could really end up hurting from this. After all, the company is still reeling from its botched attempt to separate its DVD-by-mail business from its Internet video-streaming offerings - and every misstep brings competitors like Amazon one step closer.

"Seattle-based Amazon has more than doubled the number of television shows and movies it offers its video-streaming subscribers to 25,000 from about 11,000 roughly a year ago," reports the Wall Street Journal. "That is still a far cry from the roughly 50,000 shows and movies Netflix is estimated to have, and the more than 58,400 videos Hulu offers its subscriber."

Amazon can be this aggressive in expanding its title selection, and take risks like the Epix deal, because it has its strong retail business to hedge less than profitable deals. In the case of Epix, Amazon was able to swoop in shortly after Epix ended its exclusivity deal with Netflix. Likewise, Amazon can afford to charge less for its services. Amazon currently charges $79 a year for membership to its Prime service, which provides members access to its Prime Instant Video content as well as free two-day shipping on many retail items, discounted overnight shipping, free Kindle book rentals and complimentary cloud storage. In comparison, Netflix charges $7.99 per month or roughly $96 per year.

Amazon clearly has a good thing going and its new Kindle offerings just add fuel to the fire. The question is whether it is enough.

Offerings between streaming video services are rapidly becoming so much alike that it is difficult for one to stand out over another. With such little price competition, there really is not anything to make a consumer choose one over the other. After all, be it $79 a year or $96, the cost is less than one month of cable service or a night out for four people. This is the exact same thing that happened to cable television providers like HBO and Showtime, and streaming video providers are finding the exact same solution - original content.

Just like HBO started to produce specialty television series and shows (to say nothing of those produced by Showtime, AMC and Starz), so too are streaming video content providers. "Netflix is already trying this strategy with new shows like the David Fincher produced House of Cards (from Media Rights Capital) and the return of Arrested Development. But the company is spending millions to acquire and produce new content and that might not be sustainable," writes Forbes. "John Morayniss, CEO of Entertainment One which helped finance The Walking Dead, says that right now the streaming companies are creating a kind of false economy by throwing so much money at content. Eventually, they'll either start to pay less or charge users more."

"There's going to be too much noise and content," says Morayniss. "Viewers and going to want something to help filter that out. Is it going to be through branding marketing, quality, quantity or pricing?"

I think Morayniss is absolutely correct and would advise investors to base their decisions on the ability of video streaming content companies to meet those challenges.

For my money, I like Amazon simply because it is so well-hedged. Prime service is just one relatively small piece of its profitable pie. Netflix presents a greater risk because it has only streaming content and stand-alone DVD rental plans - hardly a compelling argument. I think that even if Netflix is successful in developing unique content, Amazon will remain a player if for no other reason than it "can" - it has enough of a cash stream from its Kindle business and normal retail operations that there would be no real benefit in discontinuing the service. Moreover, Amazon provides the added bonus of its video streaming content with its other prime membership benefits. Netflix may be available on more devices, for now at least, but really it will only take one added benefit to push one company ahead of the game. To my mind, Amazon Prime provides that and I think it likely the company's video streaming content will push to rival Netflix's offerings after a few more deals - which means there is a lot of room for Amazon to move.

Some analysts say that Amazon, which currently trades around $256 could hit $400 in the next year. Given Netflix's more narrow focus, I am not nearly as optimistic. I think there is room for both providers, but I think that given Amazon's prospects and its focus on developing its offerings, I think that the company is well-positioned to deliver a solid return over a relatively short time frame. I think we could see Amazon maintain a price level of around $270 by late 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.