Amazon Causes a Netflix Problem

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some people didn't receive a very good Christmas gift this year. They couldn't access their online accounts at Netflix (NASDAQ: NFLX) and weren't able to watch their favorite holiday movies and TV shows.

The company blamed the still unexplained outage on technical problems on a subsidiary of Amazon.com (NASDAQ: AMZN), Amazon Web Service (AWS), which provides cloud-based infrastructure for Netflix. 

The disruption raises some questions. Will other companies look elsewhere for cloud-based services?

There are reports that a handful of businesses are investigating alternatives to AWS. This could benefit other cloud-based computing providers such as Terremark, a subsidiary of Verizon Communications (NYSE: VZ)

Verizon, the largest wireless carrier in the country, acquired Terremark in early 2011 for $1.4 billion. The purchase added 13 data centers to Verizon's footprint in the space. About a fifth of the business is with the federal government. Terremark has large contracts with the Federal Communications Commission and The Library of Congress for example. 

Will Amazon receive a "get out of jail free" card from analysts, the blogosphere and investors like it has in the past even if criticism was justified? Other companies that have made similar business and technical blunders have been vilified and their shares have been sold off. 

Since the much publicized "map app" flap of Apple (NASDAQ: AAPL), about 20 million articles and blogs have been written on the subject. That is an average of about 220,000 per day since the problem surfaced in late September. In combination with other woes the problem has contributed to a 22% decline in Apple's stock price recently. However, the fundamentals still look strong and there should be a reversal of fortune for the iconic maker of iPods, iPhones, iPads and Macs going forward. Many analysts anticipate a blowout quarter with estimates of over 55 million iPhones and iPads to be sold. 

In the two days since the Netflix outage about 650,000 articles and blogs have been written about that subject. Will that pace keep up? If so, Amazon could be affected, at least in the short term. Shares were down 4% in the two trading days after the outage. Netflix actually gained almost a half of a percent. 

In the longer term, the issue may not adversely affect Amazon to a big extent. The company has built up a wide moat and it will take some time for any competitors to gain a foothold. Analysts and bloggers have for some reason chosen to overlook poor results and bad press in the past. For example, even after a lackluster earnings report in October, including the announcement of the first ever operating loss in its history, analysts dismissed the news and shares are up 6% since. Apple lost 16% since an earnings "miss" of less than 10 cents a share on the same day and was trashed in the financial and mainstream media. 

Should Netflix continue to rely on a competitor for such a key part of their business? Amazon also provides video streaming services, Amazon Prime, which apparently weren't affected by any issues. That in itself raised a few eyebrows. Why was only Netflix affected? Most likely because it was a specific issue related only to Netflix equipment. 

Can Netflix survive the flap? Time will tell. The fundamentals at the company are mixed. Costs have gone up, reducing margins, earnings have gone down and the stock has lagged behind the overall market recently. However, projections are that Netflix will turn things around and earnings will increase again. Emerging markets such as Europe and South America could lead the way.

My guess is that the Netflix problem probably will not have a lasting effect on any of the players mentioned here. It might generate a few more blogs (like this one) and articles. In the long term the investing world will probably forget about this fairly quickly, unlike the Apple map problem. 


Mathman6577 owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, and Netflix. Motley Fool newsletter services recommend Apple, 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!

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