Will Amazon Dominate Video?
Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The mighty Amazon.com (NASDAQ: AMZN) has infiltrated and disrupted a number of product categories before. The company has built up a significant digital media ecosystem with shrewd acquisitions and has marketed them through its line of Kindle devices. Amazon just might be on its way to dominate Internet video streaming with its array of offerings as it looks to increase sales from digital media content.
Video offerings of Amazon
Amazon has a big advantage over other online companies as it has three different services and a massive ecosystem from its existing e-Commerce users as well as a device strategy with millions of tablet users to cross-sell its content.
Amazon's wide array of Internet video services includes, Amazon Prime, which is the firm's 2 day shipping service, combined with unlimited video streaming, as well as the lending of eBooks. Amazon also offers Video-on-demand services through Amazon Instant Video, and LOVEFiLM.
One of the major bright spots of Amazon's Instant Video is the portrayal of newer TV Shows and movies that are relatively recent, compared to other competitors. Using Amazon's IMDB as a marketing medium, the company fills a gaping hole, that other leading competitors like Netflix are unable to do. For example, a majority of Netflix's content are older than 1 year, which is a great plus for Amazon's Instant Video service. Streaming shows those are barely one week old, is a great value proposition for Amazon Instant Video, and its rival, Hulu.
Netflix leads by a huge margin
However, usage of Amazon's video offerings is not as smooth and can be confusing, as it offers quite a combination, and lists them all together. On the other hand, Amazon's biggest rival in Internet TV, Netflix (NASDAQ: NFLX) has a much smoother and easy to navigate user interface. Amazon's content collection of roughly 38,000 titles is also much lower than Netflix's content base of more than an estimated 60,000 titles.
In addition, Amazon's international streaming subsidiary, LOVEFiLM was acquired by the company in early 2011. LOVEFiLM has a strong presence in the European market with more than 2 million members across the UK, Germany, Denmark etc. Lovefilm has DVD offerings as well as the online streaming service and boasts of more than 70,000 titles. Amazon doesn't disclose the number of subscribers of its Prime and Instant services, but it is widely expected to fall in the 5 million-10 million range.
Amazon's CFO has acknowledged that Amazon is investing heavily for the acquisition of video content through its LOVEFiLM business unit for the European market. Lovefilm is still slightly behind Netflix, in terms of viewing and content library, in spite of similar pricing and a much earlier start than Netflix.
Video-on-demand has a lot of competition
The on-demand marketplace is much more crowded compared to the monthly subscription-based all-you-can-eat model of streaming. Cable firms are very dominant in the video-on-demand space. Consumers spent more than $1.3 billion for movies and other TV Shows from their pay TV service, according to a report from NPD Group.
Cable companies like Time Warner and Comcast control roughly 56% of the VOD market, and satellite TV companies like DIRECTV and Dish Network controlled 27% of the market in 2012. This should not be surprising, because it is a lot more convenient to get a movie rental via the TV relative to switching online or ordering from a store.
However, Amazon's direct competitors also have pretty significant content offerings in the on-demand space. Google has been increasingly ramping up its content offerings through Google Play as well as through YouTube. Apple's iTunes has a significant footprint in the on-demand movie category as well.
Amazon's biggest rival in the retail space, Wal-Mart (NYSE: WMT) also has a big offering in the form of its Vudu Segment. Wal-Mart acquired the on-demand video streaming company, VUDU in 2010, and now it boasts of having the highest number of HD Movies in its catalog.
Amazon's device strategy: Content marketing through tablets and ecosystem
With more than 200 million customer accounts, Amazon can tap into its existing user base for selling more Prime subscriptions. Also the increased popularity of its hardware offerings will provide additional growth prospects for the company's video content offerings as well. Amazon’s tablet devices are increasingly becoming more and more popular as the top four best-selling items in the platform are the four Amazon Kindle devices. The company is ramping up its ecosystem further with Kindle Store expansions in countries like Canada, China and Brazil.
The percentage of Prime customers who are watching free content through the Prime Instant Video platform has increased substantially from a year ago. Also, Prime memberships have gone up dramatically on a year-over-year basis, and these consumers are watching their free content and purchasing additional digital offerings as well.
Landing numerous content deals
In addition, Amazon is signing video licensing agreements with big name studios like Warner Bros and Turner Broadcasting. And going forward will add original and exclusive content on both Amazon Instant Video and on Amazon Prime Video. The substantial amount of newer and exclusive content offerings should aid in getting more subscribers for the Video offerings from Amazon.
Amazon even struck a content deal with Epix, which was a major supplier to Netflix. Amazon is willing to spend big money on landing content deals, as Epix's deal with Netflix was costing an estimated $200 million annually.
Service differentiation original content
Amazon is also producing original content, just like its video streaming rivals, Hulu and Netflix. The original content strategy has worked very well for Netflix, as its recent release was very well received and generated significant public attention as well.
Amazon is in the process of producing numerous pilot episodes through Amazon Studios. It will take the opinions of its subscribers based on the pilot episodes, to decide whether to produce the content or not. The crowd-sourcing process might aid in determining the probability of a TV Show's success, but it might be inaccurate as well. However, original content differentiates the service from rivals like Netflix, and Hulu as the show will be available to the subscribers of Amazon only.
Amazon has stated that users are more likely to frequent its e-Commerce platform, when they are enrolled members of Prime. As a result, the company can attribute some of its content costs, to its online store, and add more content. Amazon gets to use its original content through three different services, and market it through its massive ecosystem and hardware devices. However, it faces pretty stiff competition from the category leader, Netflix.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!