Why Amazon’s competition is good for Netflix
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.