Can Amazon push Netflix out of limelight?

Amazon.com offers to stream free movies to Prime members. The service isn't a Netflix killer yet, but it's only the merchant's first volley in the growing streaming media sector.

Greg Sandoval Former Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
Greg Sandoval
4 min read

For years, Amazon appeared to be a big pushover when it came to delivering Web entertainment.

Jeff Bezos, Amazon CEO CBS

During the early part of the Internet Age, Amazon shipped CDs and DVDs to customers who ordered them via the Web and CEO Jeff Bezos' company became synonymous with Web music and movies. Then Apple's iTunes, and Netflix, laid waste to physical discs by delivering digital downloads and streaming video, and Amazon quietly drifted to the back of the pack.

But today Amazon flexed some muscle of its own by announcing it would stream movies for free to people who subscribe to the e-tailer's Prime service. Amazon Prime subscribers will be able to log on to the Web from Internet-connected devices to instantly access a pool of 5,000 films and TV shows. The way Amazon Prime works is that members pay $79 a year to receive unlimited free two-day shipping without being required to meet any minimum-purchase requirements.

Plenty of commentators in the blogosphere are noting that Amazon's video service isn't a Netflix killer, and they're right--but this is just the merchant's first volley as it prepares to take on Netflix, Apple, and others in the growing streaming media sector.

The imagination runs wild when one considers what Amazon could do if the Web store throws its considerable retailing and financial girth into marketing a streaming-video service. Amazon can advertise the service to the 65 million online shoppers that visit the company's site each month. The company could promote and bundle the video service with all kinds of other product offerings. Dan Rayburn, an analyst covering Web video for consulting firm Frost and Sullivan, said Amazon could conceivably sweeten its offer by selling deeply discounted set-top boxes that enable Prime subscribers to watch streaming video on their living-room TV sets.

Heck, Amazon's deep pockets might allow the company to give those boxes away. Consider that Amazon is picking up the bill for the rights to offer the streaming video, but so what? Amazon is loaded. The retailer reported $3.7 billion of cash and cash equivalents for the 12 months ended December 31, 2010.

With a snap of their fingers, the Amazonians now offer an unbeatable subscription price.

Another advantage Amazon has over Netflix is that the company has the horsepower to stream video to Prime members without having to pay a third party. Netflix can't say this. On the contrary, the company overseeing that chore for Netflix is Amazon's Web Services (AWS). That's right, Netflix is dependent on a rival for some back-end operations. But as full of potential intrigue as that sounds, it's doubtful Amazon would ever undermine AWS' reputation by torpedoing Netflix that way.

Wall Street apparently believes Amazon could cause Netflix some hurt. Netflix's stock tumbled more than $13, or 5 percent, in afternoon trading. Netflix shares have skyrocketed the past year, posting an all-time high last week when it topped $247.

"A growing market attracts competitors," said Netflix representative Steve Swasey.

Investors should take into account that Amazon is unlikely to unseat Netflix anytime soon. Netflix has more than 20 million subscribers, a far larger selection of films and TV shows than Amazon, and has already shown that it can outmaneuver larger players. Experts once thought Blockbuster, the brick-and-mortar video-rental chain, would smash Netflix. The opposite happened. While Blockbuster was still charging late fees and inspiring consumer bitterness, Netflix was delivering videos to customers' doors via the U.S. Postal Service--creating an entirely new delivery model--and telling users to hang on to the DVDs as long as they liked without charge.

Amazon also has several businesses to distract management's attention. Netflix thinks exclusively about delivering movies and TV shows. The company has posted a team of dealmakers in Hollywood to build ties with the studios. Netflix has deals with such content suppliers as Warner Bros. Pictures, Relativity, Starz, and Epix, and just today it added TV shows from CBS, parent company of CNET.

And consumers are already streaming video from Netflix via more than 200 different kinds of Internet-connected devices, such as video-game consoles and Web-enabled TVs, which are compatible with the service. Even if Amazon did offer a Roku-like box for free, it would likely take the company a while to cut enough of similar deals to make itself as widely available as Netflix.

The real loser could be Hulu, the joint venture operated by Disney, NBC Universal, and News Corp. that has recently suffered from internal strife. Hulu offers some content for free but the service requires users to pay $7.99 to access a growing number of shows. In addition, Hulu's pay service also forces viewers to watch ads. Amazon's new video service is ad free.

Regardless of which company takes over, with all the price cutting and scrambling to add programming, the real winner--for the time being at least--will be consumers.