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Amazon Holds The Key To Become The Number One Streaming Company

|About: Amazon.com, Inc. (AMZN), Includes: AAPL, NFLX

Summary

Amazon offers a music and video streaming service through Amazon Prime..

Amazon Prime has an attractive pricing model compared to industry peers..

However, Amazon Prime's music catalog and original video content are two weak spots.

Consumers eventually will pick a streaming service based on both pricing and content.

I findt that Amazon has a unique position to become the number one streaming company.

With all eyes focused on rapidly growing video streaming services like Netflix (NASDAQ:NFLX) and Google (GOOG, GOOGL) owned YouTube, combined with the ongoing battle between streaming music services Apple (NASDAQ:AAPL) Music and Spotify, it is easily to forget that there is another large streaming service provider to consider as a candidate for the number one streaming company in the world: Amazon (NASDAQ:AMZN). In fact, Amazon is in a great position to beat all other streaming companies. In this article, I will discuss why Amazon holds the key to become the number one streaming company in the world.

Amazon already surpassed the stage of being 'only' the world's largest online retailer. For example, Amazon has a fast-growing cloud business called Amazon Web Services. Through AWS, Amazon offers several cloud solutions to consumers and businesses. Further, Amazon offers a premium subscription for its customers. Next to faster shipping, subscribers get access to free blockbuster films and TV series, are able to stream music out of a 1 million music catalog, are able to read one of the 800,000 e-Books and more.

In this article, I will discuss Amazon Prime's pricing model and catalog compared to both music and video streaming competitors. Next, I will discuss my view of streaming services in the future.

Pricing

A subscription to Amazon Prime costs $99 per year or $8.25 per months, cheaper than the average $9.99-per-month subscription of other streaming services like Spotify, Apple Music and Netflix. Amazon Prime offers a broader range of services at a lower price. Why pay $9.99 per month twice for both a streaming music and video service while Amazon Prime offers both at a lower price? This is one of the most important competitive advantages of Amazon Prime over other streaming services available.

On the other hand, Amazon Prime's pricing does present a challenge for Amazon as well. Since the service doesn't generate as much as revenue as other streaming services, total royalty payments to right holders are lower as well. This caused Universal Music Group (OTCPK:VIVEF) to back down from a licensing agreement with Amazon. As a result, Amazon Prime doesn't include stars like Taylor Swift and Katy Perry. On the other hand, Amazon was able to close deals with Warner, Sony (NYSE:SNE) Music and most of the independent labels.

Catalog

From a pricing point of view, Amazon Prima has the upper hand over its competitors. However, the company failed to close a licensing deal with the largest record label in the world, Universal Music Group. As a result, Amazon Prime offers around 1 million songs compared to 30 million songs offered by Spotify and Apple Music which is backed by the entire iTunes catalog. Here might be a problem for Amazon Prime. The company has a limited music catalog compared to other streaming music services. As more streaming services are introduces, having a unique catalog is key nowadays.

Amazon Prime looks like to have the upper hand with the largest video catalog. Amazon Prime even exceeds Netflix's 10,000 titles. One of Amazon Prime's advantages is its deal to stream popular HBO TV series such as Game of Thrones and the Sopranos. HBO series are currently not available on Netflix. Netflix's unique content however is a big plus. On the other hand, Amazon Prime has some catching up to do with Netflix when it comes to original content. Netflix's original series House of Cards and Orange is the new Black are far more popular than the original series of Amazon Prime.

Future of streaming

Streaming is not just another trend, it is really changing the way consumers are watching videos and listing to music. To find evidence of the streaming trend, investors should look at the growth of active users of streaming services. Netflix almost doubled the total number of streaming subscribers in two year time. This also applies to Spotify. Further, Apple Music was able to attract 11 million active users within one month after launch. There are plenty of other examples to show the streaming trend is real. As a result, investors should take investments in streaming service providers serious.

In my opinion, the future is streaming is all about offering a service that is as complete as possible. Consumers are looking for an easy way to access a broad catalog of both music and video. It is likely that this is the reasons why Spotify announced a move towards video content in May of this year. I already concluded that Netflix buying Spotify is not a crazy idea and actually makes sense. Amazon is in a great position to become the first stand-alone streaming service provider to realize this idea of a unique catalog in both music and video content.

Conclusion

The title of this article is "Amazon Holds The Key To Become The Number One Streaming Company." In my opinion, this key is the company's ability to offer both a large video and music catalog to consumers at a fair price. All the ingredients are there, however Amazon needs to solve several issues in order to actually become the number one streaming company in the world.

First of all, Amazon needs to figure out how to persuade Universal Music Group to sign a licensing agreement and make its music catalog available for streaming. Amazon Prime's 1 million catalog is quite modest compared to its competitors Spotify and Apple Music. Considering the competitive streaming market, consumers will eventually make a decision for a streaming service provider based on both pricing and content. In order to become the number one streaming company, Amazon needs to match the music catalog of its competitors.

Further, Amazon needs to keep up with Netflix's original content. The company is on the right track considering the developments in the second quarter of this year. However, Amazon's original series cannot compete with Netflix's original content just yet. By providing more original content, Amazon can bind consumers more easy to its service because of the more unique catalog.

Overall, I am quite positive about Amazon's potential as the number one streaming company. From this perspective, I would also not make a big deal of the company's current valuation. Investors might argue that the company is quite expensive right now. Although this is correct by looking at traditional P/E ratio and P/S ratio, Amazon should be valued as a company that will benefit from a larger scale. For example, the market values Netflix at 7.7 times this year's revenue. Therefore, investors should consider a longer investment horizon before these companies will actually report strong profits.

Despite my bullish view on Amazon and its potential to grow streaming revenue strongly in the next few years, the company has some catching up to do. According to Netflix's latest earnings report, Amazon Prime only accounted for 2% of total peak megabits streamed compared to Netflix's 36%. On a more positive note, there is still a lot of market share to be gained for Amazon.

Disclosure: I am/we are long AAPL, AMZN, VIVEF.

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.