Amazon Prime Streaming Will Disrupt Netflix, Here’s How

Amazon-prime-logo Over the past 24 hours, I've read a lot of blog posts about Amazon's new Instant Video streaming offering available to Amazon Prime subscribers, yet there are a bunch of really important aspects about the service no one seems to be discussing. When detailed it is clear that over time, Amazon will absolutely compete with Netflix for the digital delivery of movies and TV shows and become a dominant force in the market.

For starters, I don't see anyone talking numbers when it comes to Amazon Prime subscribers or the potential revenue Amazon generates from it. While Amazon has not publicly said how many Prime members they have, analysts on Wall Street all seem to agree that there are about 10M Prime members. Of those, it is estimated that 60% are paying members. If that's true, and it sounds rational, Amazon brings in $474M a year in revenue from Prime subscriptions.

If Amazon could add 5M paying Prime members this year, they would generate nearly a billion dollars in revenue from about 10M Prime members. That's a lot of money they can then use to license content and Amazon would very quickly be at half of Netflix's subscriber count. While some of the money from Prime would have to go to offset the cost of shipping physical goods, numbers I have heard suggest that Amazon's Prime members buy more than 4x more goods than non Prime members. As a long time Prime member myself, I can say that definitely rings true since I always check Amazon first knowing I get free shipping.

While there seems to be a lot of talk around Amazon Prime being cheaper than Netflix's streaming only option, that's really not a big deal. The bigger point is that anyone who signs up for Amazon Prime immediately sees it as a way for them to save money. To date, that's the only reason why someone would become a member. Spending $79 means you will end up saving more than that in shipping each year. Very simply, Prime has always been all about a way to save money.

Of course, for a small percentage of Netflix customers that is the same reasoning since some members use Netflix streaming in place of other more expensive video services. But with Prime members, that's the case for all of them. It's a very easy sell. Add in the fact that you now get free streaming of movies and TV shows and Prime has a lot more value than Netflix. When compared to Netflix, the selection of content in Amazon's Instant Video streaming service is about 25% of what Netflix has today. The quality of video with Amazon's service is not as good and Amazon's Instant Video offering is not yet on a lot of devices. But the fact is, these were all of the same shortcomings Netflix had in the market when they first started their streaming offering.

Amazon can and will get on devices very quickly and one has to remember that Amazon is not starting from scratch. They have had their Amazon Video On Demand application on devices like the Roku and TiVo for years and Amazon does not lack the technical expertise or resources to get Prime streaming to more platforms. It won't happen overnight, but it won't take years like it took Netflix when the broadband-enabled device market was still just starting out. And with the success Netflix has had in the industry, there are plenty of device manufactures and platform providers who are going to be very eager to work up with Amazon to add more content choices to their devices.

When it comes to the argument that Amazon's video quality is not as good as Netflix, that's a valid one, but one that will be short lived. I don't know if anyone has noticed yet but Amazon is not using their own CloudFront CDN to deliver the Prime videos. So far, of all the videos I have traced they are all coming back to Limelight Networks. I know Limelight was doing a large majority of the delivery for Amazon Video On Demand, and it's clear they are also delivering videos for Prime. This is relevant because Limelight is one of the same CDNs that Netflix uses. So when it comes to the quality of videos being delivered, the difference between Amazon and Netflix simply boils down to the encoding specs.

While I have seen some folks like CNET say that Amazon's streaming is "comparable to Netflix HD", that's factually not accurate. There is something to be said for one's own interpretation of what defines quality, but Amazon has given out the specs on their encoding for Prime streaming and it maxes out at 1.3Mbps, far lower than what Netflix encodes for. Amazon does offer higher quality streaming at 720p, but not for free videos via Prime as of yet. Updated: Amazon has confirmed that they do offer up to 720p video quality for Prime streaming, but for some reason I still can't get above 480p when I watch content.

As most folks already know, Netflix uses Amazon's Web Services for a substantial portion of their web-hosting and video transcoding infrastructure. In a recent filing, Netflix warned that any disruption of Amazon's service would have an impact on the company. In the filing Netflix said, "While the retail side of Amazon may compete with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service."

That's an interesting statement from Netflix and while they are talking about a technical advantage, Amazon already has a competitive advantage over Netflix when it comes to cost since Amazon owns the infrastructure that Netflix is leasing from them. And at some point, Amazon will most definitely use CloudFront to deliver their videos and move away from using third party CDNs. That's another cost advantage Amazon will have over Netflix, who is estimated to spend more than $50M this year just in video delivery across third party CDNs.

Amazon has a big advantage over Netflix of being able to allow their core business drive the growth of their streaming service without having to worry about how many members they sign up each quarter, which is exactly what Netflix is so dependant on. The company has the ability to essentially subsidize the streaming service for quite some time, allowing Amazon to spend money on licensing more content and quickly expanding their inventory. Anyone who thinks Amazon won't spend the kind of money Netflix does to license more content is seriously underestimating the company.

Another big advantage Amazon has over Netflix that no one seems to be discussing is the fact that Amazon also sells and rent digital copies of movies and TV shows. Adding a subscription service now gives Amazon three different ways to get in front of the consumer and multiple ways to generate revenue. More importantly, the multiple distribution models are something the content studios love and want to see more of.

Studios I speak to say all the time that they wish Netflix would also offer a pay-to-own download service for newer content, as the studios want to leverage the audience base Netflix has built. For Amazon, they have already this business model in place and one would expect that their free streaming of content will absolutely drive the sale of more digital content for the studios, especially considering how easy Amazon's 1-Click option makes it to purchase content.

And just imagine the disruption Amazon would create in the market if they released a Kindle capable of playing video or subsidized the cost of getting Prime members a broadband-enabled device? The thing about Amazon that I think most people miss is that they own the entire ecosystem of distribution for video, something Netflix can't do. Amazon still has a long way to go before their Instant Video streaming offering is considered on par with Netflix, but anyone who thinks it is going to take Amazon year's to compete with Netflix is truly underestimating the company.

  • Spaul

    Also don’t forget.. Amazon owns IMDB the single largets movie database.. bigger than NetFlix’s comments and Movie information database.
    Its only a matter of time before they are all connected.

  • Gary

    also worth noting that Amazon now entirely own Lovefilm which is a UK version of Netflix which has a streamed content too giving them further expertise. Amazon could potentially have a international market for streaming that netflix cant match, although they will have to get the rights in each region.

  • http://profile.typepad.com/6p010534c8f494970c Rob Martin

    No, it won’t.
    The $96 for Netflix streaming gets you a sizable library to watch, and 720p in many cases. Amazon has a tiny library, and is more interested in baiting you to buy VOD – the absolute opposite of Netflix.
    Why would I pay another $79 for a lesser service?
    This “service” will be gone within the year, unless Amazon substantially improves its library, resolution, and negotiates with the content industry to deliver ala-carte cable channels.

  • Ric

    As much as I love Amazon for all things retail, they will at best be just a fringe competitor at best, if the service survives beyond an initial service offering. Netflix wont stand still waiting for them to catch up and Amazon is DOA for a ‘complete service’ that includes disc media content.
    They may carve a niche business, but nothing more than that.

  • http://profile.typepad.com/yephora Yephora

    “As a long time Prime member myself, I can say that definitely rings true since I always check Amazon first knowing I’VE ALREADY PAID FOR SHIPPING.”
    Corrected for the author.

  • Anderson

    What some of the commenters seem to be overlooking is that Amazon streaming is simply an added value item on top of the free^Wprepaid shipping that was previously the main draw of Prime in the first place.
    For myself, Prime already pays for itself over the course of a year; 2 day shipping for a year’s worth of purchases would otherwise cost more than what I’m paying for yearly membership fee; hence, the addition of free streaming is just that: free. No extra cost to me.
    My concern is Amazon will wake up to this and charge more for Prime, at which point competing services will (again) look more attractive.
    Amazon’s pay-to-own service, which they’d naturally want to increase revenue from, will need to support more target platforms, however.

  • Jon

    According to the survey, 87.5% of Netflix customers who use that company’s streaming service also shop at Amazon.com, and 18% of those respondents are also Prime subscribers. Now for the telling statistic: 36% of existing Prime subscribers surveyed said they would cancel their Netflix subscriptions in favor of Amazon’s service. 33% said they would keep their subscriptions to both Netflix and Amazon Prime.

  • scJohn

    What device(s) are you trying to get the HD stream on? My understanding is the HD stream is only available to set top boxes. PC, MAC, or anything using a browser to do the streaming will only get the SD feed.
    The vast majority of that $474M from PM goes directly to the bottom line as profit. If Amazon spends that money for content then that will have an impact on their earnings.
    If I understand the CDN business correctly, the cost of delivering the content is very small in relation to the cost of the content. (See Epix deal.) Therefore I’m not sure that Amazon’s infrastructure is going to that much of a competitive advantage. The cost of content is gong to hugely expensive from this point on for Amazon and NetFlix.

  • James Robbins

    Netflix offers subtitles and captioning in their service (granted, it differs from console system, PC and streamboxes.)
    Currently from what I can tell, Amazon does not. This is a huge deal breaker for some number of people I associate with.
    I don’t see amazon being useful in this aspect if they ignore this accessibility requirement.

  • InvestorGater

    Dan, you said:
    “The quality of video with Amazon’s service is not as good and Amazon’s Instant Video offering is not yet on a lot of devices. But the fact is, these were all of the same shortcomings Netflix had in the market when they first started their streaming offering.”
    Dan, are you suggesting that 2011 videophiles forgive Amazon’s primordial technology and regress to it, perhaps as a show of solidarity against progress?
    Have you tried telling today’s audiophiles that they should try vinyl because that was the acceptable medium decades ago?

  • http://profile.typepad.com/kevinmarketing Kevin Horne

    Even tho the author goes to great lengths with many arguments, he seems to skip lightly over the library issue – for which Netflix dominates head to head streaming.
    Either way, i think the more interesting thing to watch in this space will be Netflix’s share price post-Q2 earnings. Not subscriptions or revenues, but earnings – the money it keeps after expenses. If you thought Amazon’s announcement was a jolt to NLX, just wait…

  • amazon good

    wow amazon become bigger, they have imdb the biggest movies database.. good jobs to amazon team

  • SD

    it sounds rational, Amazon a year in revenue from Prime subscriptions.

  • http://createdbyu.blogspot.com Sharon F

    Interesting article, thanks and will check it out!

  • Probroker

    Amazon Prime may offer a well rounded package, their video stream service is plagued with glitches and errors. To name a few, rental video charges being billed in duplicate, videos only streaming trailers and not the program, their android app cannot disable the screen saver thus sending a stream into sleep mode. Their customer service response and follow-up is almost non-existent and the list goes on. We were glad they offered a 30 day free trial or it would have been cancelled after the 1st week. Another glitch, password changes do not update on android apps for at least 24 hours, our opinion is that Amazon should have spent more time developing service features before rolling out. The free video streaming library is a fraction of what Netflix offers. Their site claims an xx amount of videos but they fail to mention only a small % of that count are free through service.

  • http://duddits-fairuse.blogspot.com/ duddits-fairuse

    Fast Forward to February 24, 2014.

    For Christmas my wife surprised me with a Kindle HDX 8.9 tablet. I am the sort that lives in front of 27″ iMacs and big ass’d LED HD TV’s; I never considered the Kindle ‘ebook reader’ as a serious screen. Mistake corrected. My Amazon Prime Instant Video consumption skyrocketed; free episodes of TV shows are up, buying single episodes of current TV shows doubled (I usually buy season DVDs not cloud files).

    The deal maker is Xfinity TV Go and NBC Live Extra are apps on the Kindle. NBC just finished delivery of the winter Olympics and much of my viewing, live and full event replay was on the Kindle. Since I was in a hotel the channel lineup is the expected basic feed. Now the Kindle HDX comes through by playing Xfinity streams, whatever is on TV Go, movies, TV series, live and all premium channels I subscribe to.

    Since the Kindle HDX ships without Adobe Flash Player plugin the apps have total control of the stream (Adobe SDK I think). I was hard pressed to find flaws in the delivery of streams, the quality of streams and UI of the player. Note: I had hotel wifi with unpredictable bit rates which was handled without video freeze waiting on buffer loading.

    I would venture a guess Kindle HDX + Amazon Prime + Xfinity Go = No need for Netflix. That’s just my take on who is winning and losing.