Why Amazon’s competition is good for Netflix

By Felix Salmon
September 4, 2012
predicted that Netflix would find itself forced to move from exclusive contracts to non-exclusive contracts for the material it's streaming. And today, that's exactly what's happened.

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Last year, with Netflix’s stock price plunging, I predicted that Netflix would find itself forced to move from exclusive contracts to non-exclusive contracts for the material it’s streaming. And today, that’s exactly what’s happened: a huge slug of Netflix’s movies are now going to be available on Amazon as well.

This is, trivially, great for consumers. When multiple platforms are all streaming the same movies, those platforms are forced to compete on price, on ease of use, on reliability, and on all the other things we couch potatoes care about.

But the immediate reaction of Netflix’s stock price was sharply negative, with the shares falling by 10%. Since then, however, they’ve recovered a bit, and I think that’s exactly right: if video content becomes not only non-rival but also non-exclusive, that’s almost certainly good for Netflix.

Think about it this way: up until now, when Netflix has signed exclusive deals for TV shows and movies, the enormous sums involved can be broken down into two parts: one part for the right to show the material, and another part for exclusivity. If Netflix gives up on exclusivity, that means that it’s paying less for the material, and that all the money it’s spending appears on the screens of subscribers, rather than showing up also in the absence of that material on the screens of non-subscribers. If Netflix is convinced that its value proposition for subscribers is a good one — and I think that it is — then it shouldn’t need to pay untold millions of dollars to keep non-subscribers from watching certain shows.

What’s more, the big underlying problem with the Netflix business model is that it never had much of an opportunity to make profits: if it was buying up exclusive rights, then the studios would always just jack up the price of those rights to Netflix’s pain point, and and Netflix would be forced to pay. Netflix, under the old model, needed the studios much more than the studios needed Netflix.

But under a non-exclusive model, all that changes. Video content becomes a commodity, with the studios happily renting it out to anybody who wants to stream it — Netflix, Amazon, whomever — probably at a standard price-per-stream with a certain guaranteed minimum. That puts the various competitors on a level playing field, and forces them to compete on customer service, user interfaces, reliability of evening-time bandwidth, and so on and so forth. And that’s where Netflix shines, as David Pogue recently concluded:

The bottom line: Netflix beats Prime on movie selection, site clarity and playback features. It has much more to watch, too; Netflix won’t say how many movies it has, but informed estimates put its catalog as twice the size of Amazon’s.

Ever since it started streaming movies, Netflix has found it very hard to turn that superiority into profits. Ironically, now that Amazon is beginning to buy up the same movies that Netflix has, such profits might well be easier to come by.

Update: Matt Yglesias replies.

In a commodity video world, the companies that win will be the companies that can embed streaming video in a larger business proposition. Apple, for example, could offer a streaming video subscription plan at cost as a loss-leader for selling iPads. That’s not Amazon’s current business model with the Kindle Fire or Google’s with the Nexus 7 but it could be. Even under its current model, Amazon wants to sell Prime subscriptions to help entrench its position as the Wal-Mart of the Internet—Netflix needs to actually make a profit, but selling commodities in a competitive market isn’t profitable.

8 comments

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The interface is really my main problem with Amazon’s streaming service. Until it stops looking like any old Amazon department and is spun off into its own service, they’re going to struggle to compete. The site is such a mess.

Posted by adamcohen15 | Report as abusive

NFLX didn’t do what AOL did. They should have looked at their stock at $300 as the massively massively inflated currency it was and bought CBS or the content end of Sony both of which could have been had.

What NFLX needs to do is secure “forever content.” IE when they sign a non-exclusive agreement for seseame street they just need to buy permenent access to the 5000 shows that already exist. That way they are building their libiary continuously larger and the $9.99/month provides slightly more value each and every month.

Posted by y2kurtus | Report as abusive

What I’d really like to see is the opposite, i.e. Netflix to start competing with Amazon by renting out e-books.

Given that e-books have no residual value once you’ve read them (unlike physical books, you can’t give them to someone else or re-sell them), it makes much more sense to rent them for a short period of time (like a movie) instead of buying them.

Although I’m a vorcaious reader, I’ve jump onto the e-reading bandwagon because e-books are simply way too expensive. However, offer me the option of renting an e-book for $.99 a week, and I’d buy an e-reader in an instant.

Posted by mfw13 | Report as abusive

What I’d really like to see is the opposite, i.e. Netflix to start competing with Amazon by renting out e-books.

Given that e-books have no residual value once you’ve read them (unlike physical books, you can’t give them to someone else or re-sell them), it makes much more sense to rent them for a short period of time (like a movie) instead of buying them.

Although I’m a vorcaious reader, I’ve jump onto the e-reading bandwagon because e-books are simply way too expensive. However, offer me the option of renting an e-book for $.99 a week, and I’d buy an e-reader in an instant.

Posted by mfw13 | Report as abusive

Well, if it forces Netflix to buy some more copies of its movies so that I can get what is in my queue in less than 4 years (yup, that is how long I have been waiting for Booz’s Booty Review…mot to mention “Strongman” “Small Crime” & “highway Patolman”)

Posted by fresnodan | Report as abusive

“but selling commodities in a competitive market isn’t profitable.”

I think 6 of the 10 most profitable companies in the world sell commodities actually.

What NFLX should have done is what AOL had the presence of mind to do. When their stock was trading for 20x enterprise value they should have bought CBS or the content side of Sony either one or even both of which they could have had. Then they would have had the cable companies beating down THEIR door to do licensing deals.

If they had CBS they could be swapping Comcast access to CSI and the Mentalist for PERMANENT access to SNL and Seinfeld reruns.

Every dollar NFLS spends on content needs to be “forever” content rather then 6 months, 9 months, 18 months or whatever. That way every month the $9.99 customers pay buys them a bit more. Customers don’t care at all about exclusivity… why stop someone on DISH or Xfinity from watching something? What they do want is access to as much fresh programming as possible for the $9.99.

Posted by y2kurtus | Report as abusive

The studio’s don’t want Netflix to be profitable anymore now that an unlimited streaming plan is cutting into their physical media empire, whereas Amazon sells the physical media, and perhaps they see Amazon as an avenue for better revenue for the studios. I’m just thankful that my employer, Dish, bought Blockbuster because now Blockbuster @Home gives me both streaming and discs by-mail for less than both services from Netflix. The best selection and quality of movies with instant gratification are what I get from both streaming and mail, so I get to have my cake and eat it too.

Posted by JimmyMackey | Report as abusive

Right now the streaming market is really all about the rights to back catalogues of old TV seasons that subscribers may have missed when they first aired. It’s a misconception to suggest it has anything to do with “movies”. Right now if you want to stream a movie, you pay $4 or $5 to Apple or Amazon according to exactly the kind of “commodity” business model Felix describes. But that is not Netflix’s game at all — they are selling me all-I-can-eat streaming at a low monthly rate. Sure it’s mostly TV shows I’m watching, but they have some very fine shows to choose from and there’s no way I would be watching most of them under the “commodity” model where I pay $2 or $3 for each episode I want to watch. That’s a vastly inferior deal for the consumer.

As for Amazon trying to directly compete with Netflix with their Prime offerings, they can acquire all the licensing they want, but their product is still fatally flawed for the same reason: the UI sucks for finding free stuff to watch. It is transparent that they are using their free streaming options simply as a lure to advertise their non-free streaming options. If they make their interface more comparable to Netflix then maybe their acquisitions will actually matter from a consumer choice perspective. Until then, not so much.

Posted by UselessRubbish | Report as abusive