Netflix and the Amazon Threat

Netflix has become the face of OTT video in terms of the opportunities and problems it presents, but the company now obviously has some challenges of its own to face.  The latest quarterly numbers for Netflix were actually very good; they beat analyst estimates handily.  The problem is the price hike they initiated recently, a plan that raises costs for some customers by 60%.  The stock was hammered in after-market trading and it’s off this morning in pre-market too.

I commented when the change was made that Netflix faces a problem common to all OTT video streaming plays, which is that they have to rely on getting content from others.  Everyone realizes that video and movies are a multi-tier distribution system, and that any time a new option is added it necessarily impacts the revenue stream of the others, particularly adjacent ones.  So streaming impacts DVD sales, sales of movies to TV syndication, and possibly even the “long tail” of the material, the latter by increasing near-term exposure.  Since all these channels compete, the price for content to stream is under pressure.  Netflix could at first pluck some low apples, but inevitably it will need to move closer to the high-value end of the chain where acquisition costs are the highest.

Another player who demonstrated a fall from grace was RIM, of course, whose PlayBook has been a market failure of the first order.  Some surveys show that “tablet” buyers rate Barnes & Noble’s Color Nook as highly, and that speaks volumes about a tablet from a player whose Blackberry smartphones were the darling of the leading-edge mobile world just a few years ago.  HP, now promoting its WebOS tablet line, is facing its own challenge; can any non-iOS, non-Android, tablet even gain traction today?

These two announcements are related in an important sense; the consumer market in tech is a tiger caught by the tail, and barely.  Everyone who finds consumer success does so in part at least because they were favored by public tides, and everyone in the market continues to be at the mercy of those larger-scale movements.  It’s the classic butterfly-flapping-in-Japan analogy, and there are some very big butterflies entering the market.

Amazon’s tablet is the one that has the greatest potential for disruption, both in the tablet space and in the video space.  Everyone has heard the rumors; the device will be big and pretty and Android—a true tablet.  The latest rumor is that it will also be less expensive, subsidized in part by ebook revenues.  Ironically, Apple may have created this monster itself by refusing to allow ebook reader apps to support purchases from the retailer’s own store directly; Apple wants their cut.  Nobody can pay 30% to Apple on the sale of an ebook; the margins are too thin already.  So Amazon will be a tablet player this fall, and B&N will certainly upgrade its Color Nook, at least in terms of Android functionality if not in terms of a new or higher-end model.  That generates a big new dynamic in the tablet space, particularly if the gadget is cheap.  Surveys suggest Amazon would be the most credible tablet player, in fact.

That then has a video impact.  Remember, Amazon has its own movie service, one that includes a massive number of free titles to Amazon Prime (free shipping for a modest annual charge) customers and a good selection of other movies.  While the service hasn’t caught on like Netflix, would a beautiful tablet help the penetration?  I think so.  And of course Amazon has a lot of ways to leverage its tablets beyond video.  Does Netflix then follow Amazon in becoming a tablet player?  You see the problem.  The model of Netflix is vulnerable to the pressure of giants like Amazon who can step beyond streaming into what you’re streaming TO, and then step again out of video into books, software, and a full retail product inventory.  That combination could even challenge Apple.


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