Recently Amazon(AMZN) announced a Netflix(NFLX) like streaming service which will be provided free to Amazon prime customers. Users will have to pay $79 per year for free 2-day shipping on prime eligible items, discounted one day shipping and free unlimited streaming of 5000 TV shows and movies . On the face, it looks like Amazon is trying to compete with Netflix but if we dig deeper, it becomes clear that it is trying to pull customers away from Wal-Mart(WMT).
What’s on your face: Netflix charges $96 for its “unlimited streaming” service and Amazon will be charging $79 for its “unlimited streaming”. So both companies seem to provide same service albeit Amazon’s service is much cheaper (by $17). But if you look into details of Amazon’s library content (which you will, if you want to switch from Netflix to Amazon), you would want to keep Netflix.
Actually there is another way of looking at Amazon’s streaming service. Instead of it costing $79 we can consider it an additional perk for using Amazon Prime. And this perk comes for free to Prime customers.
Let’s get it from Wal-Mart: What good a streaming service will do to Amazon, if it’s free? Well for one, free instant streaming will make its Prime service more valuable to consumers. This means more people are going to subscribe to Amazon Prime. As per Piper Jaffray analyst Gene Munster, there are about 5 million users of Amazon Prime. That means those users will not drive to Wal-Mart or to Toys "R" Us(TOYS) or any other retailer if they can order the same item from Amazon and get it delivered in 2 days (unless you do not have diapers enough for 2 days). Hence Amazon got all the incentive to make its Prime service more compelling. With growth in Wal-Mart stores slowing, it needs to watch Amazon’s every move which might make buying an item easier from Amazon than from Wal-Mart’s physical stores. Amazon is trying to get more and more sticky customers and Prime is the tool that will help achieve this goal.
First Impression: Amazon will benefit from impression that it is providing Netflix like service, in a similar way cheaper cars benefit when they compare themselves to Mercedes/BMW. So Amazon is not coming out and saying that they don't want to be a Netflix competitor. To be realistic, Amazon will never be able to provide the depth of Netflix library for free. But it is getting a free ride by getting compared to Netflix. And who doesn’t like a free ride.Even though Amazon is getting a free ride, Netflix will come out stronger. Every time any streaming service gets compared with Netflix, it helps to prove the obvious: that Netflix is still the best.
Disclosure: I am long NFLX.