Netflix - Amazon
Amazon's launch of streaming as a free option for Prime members is a growing threat to Netflix Inc., as Amazon adds more content and distribution partnerships. Reuters Inc. announced the launch of an unlimited streaming service for its Prime members at no additional cost, but the membership will continue to be $79 per year.

Amazon's launch of streaming as a free option for Prime members is a growing threat to Netflix Inc., as Amazon adds more content and distribution partnerships. Myriad caution signs continue to give us pause on Netflix valuation as signs are coming into clearer focus, said Youssef Squali, an analyst at Jefferies & Co.

After giving up reign for online music to Apple Inc.'s iTunes and others, Amazon has become more proactive as various types of content get digitized and move on the Internet. Amazon has an industry leading offering for eBooks and, while its On Demand Video has decent depth and breadth of content, the company just created option value to expand into the fast-growing subscription-based streaming content.

Amazon has been operating a Video-On-Demand streaming service for years with more than 90,000 titles. Currently, the new service will feature unlimited, commercial-free, instant streaming of 5,000 movies and TV shows including movies like The Girl with the Dragon Tattoo, Amadeus, and Food, Inc., as well as several UK TV series.

More than 60 million people come to Amazon's websites each month and millions of them are prime members. Home movie watching (Online, in-store DVD rental, DVD sales, kiosks) is a $24 billion-plus industry in the U.S. and for film content theatrical releases account for $10 billion, Cable/TV about $9 billion, and On- Demand for $2 billion.

There are many providers of home video streaming services but the prevailing business models are three: Pay-per-View (Amazon, Apple), adsupported (YouTube), and subscription (Netflix). Given that TV programming is also streamed on the Web, the addressable market for Amazon is now bigger than the $40 billion U.S. film industry and is in excess of $100 billion (including TV programming).

In our view, this seems to be both offensive and defensive move. On one hand, it brings Amazon in the fast-growing movie streaming business with a value-priced offering, on the other hand, Amazon strengthens the value proposition for its Prime program. We expect a broader roll-out of this offering in the coming quarters, said Sandeep Aggarwal, an analyst at Caris & Co.

In Aggarwal's view, Amazon wants to play a bigger role in the lucrative streaming industry leveraging its 60 million-plus monthly uniques and strong fan following for Prime. Aggarwal expects Amazon to expand its subscription-based service to broader audience and leverage its $200 million acquisition of LOVEFiLM in Europe to expand internationally as well.

While the margins will get hurt in the near term, Aggarwal totally supports Amazon’s move as it helps the company have a more compelling offering for the fast-growing streaming business/digitization of video content and also enhances the overall value pillars of Amazon Prime.

Aggarwal would recommend investors to take benefit of any weakness. Aggarwal expects Amazon to remain one of the fastest growing companies on the Internet (supported by “best-in-breed” core offering and unparallel traction for Kindle & AWS) and as the company slows down its investments during second half of 2011, he expects the stock to start rallying.

Why Netflix should worry?

While Netflix has first mover advantage and a deeper library, Amazon's offering is free to Prime users, and still cheaper than Netflix for others, at $79 per year versus $96 a year. While not imminent threats, growing competition and content costs are likely to curtail Netflix' subscriber growth and margins over time, said Squali.

Squali said given Amazon's brand, user base, technology platform and lower price, it's likely to disrupt Netflix' subscriber growth over the next several quarters.

Squali said Netflix responded by announcing a 2-year non-exclusive agmt with CBS (highest rated broadcast network). While the deal is for older catalog content, it's further evidence that Netflix has the lead in acquiring content.

On another front, Comcast's XFinity offering is rolling out fast. Comcast Corp. XFinity brand (TV Everywhere offering) has now launched on 84 percent of the largest MSO's footprint (awareness more than 90 percent), according to Comcast management on fourth quarter earnings call late last week. New customers willing to consider the brand have grown 36% since launch.

Comcast provides access to 150,000 entertainment choices and an XFinity TV app (currently only for Apple iPad) has a streaming feature with 3,000 hours of movie and TV content. At zero incremental cost to cable subs, Squali expects XFinity has to be taken seriously especially given a focus on newer shows and potentially earlier windows.

Disney increases wholesale DVD rates; encourages 28 day delay. Without incorporating a formal 28 day delay for rentals sold to kiosks and DVD sub services (as Warner, Fox and Universal agreed to), Disney's latest move appears to seek the same goal.

Squali said Disney will now charge Netflix and Redbox a higher wholesale rate of $17.99 (higher than retail DVD), dropping to $10.79 after 28 days.

Criterion collection deserting Netflix for Hulu. With only 800 titles, the Criterion collection is not significant to Netflix streaming library overall, but it does illustrate the portability of content in the digital streaming space.