How Amazon Keeps the Competition on its Toes
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Netflix (NASDAQ: NFLX) was at one time the darling of the online streaming media market. But with increased competition from companies like Amazon (NASDAQ: AMZN) and Hulu (a partnership with NBC Universal, Fox Entertainment Group, Disney-ABC Television Group, and Providence Equity Partners), Netflix needs to up its game or it may become just another option for those wanting to watch a movie or television show on a Saturday night (or any other night).
To show just how serious Amazon is about beating Netflix, the company recently struck a deal with Warner Bros. Domestic Television Distribution to offer television shows like The West Wing and more on its Prime Instant Video service. The company also plans to add more titles to its other streaming movie service, Amazon Instant Video.
Amazon's Two Streaming Video Services
With a two-prong attack, Amazon hopes to attract as many people as possible to its online streaming services. Amazon Prime, a membership service that includes free two-day shipping in addition to access to over 18,000 movies and television programs among other perks, costs $79.00 per year. For those that purchase items from Amazon on a regular basis, this is a great deal.
But for those that don't want to pay an annual membership fee, Amazon offers Amazon Instant Video services, which has a database of 120,000 movies and television programs. Customers can rent or buy media at any time for download.
Targeting two specific groups of customers – those that frequently shop on Amazon and who don't mind paying an annual membership fee and those that don't want to commit to a membership in order to stream online media – is a smart move as most people fit into either category.
Even if many of these customers already have Netflix memberships, Amazon will gain exposure as a viable alternative.
Amazon vs. Netflix
Last year, Netflix readjusted its pricing policy and faced a potential public relations disaster when customers complained of being forced into streaming only or paying extra for DVD's sent by mail (until 2011 Netflix included streaming movies in all DVD home-delivery packages). This just proves how limiting service choices can affect the perception of a company and how negative press can trigger fast revenue losses.
Amazon provides more freedom and choice for consumers by offering two streaming media options. And even though Netflix may have many more titles at present than Amazon, sooner or later the company will catch up.
Another major difference between the two companies lies in sales/revenue and net income. According to 2011 income statements, Amazon made $48.08 billion in sales/revenue with a net income of $631 million, while Netflix made $3.2 billion with a net income of $226.13 million.
It should be noted that Amazon has many more income streams than Netflix, so its profits should be higher. But it is for this very reason that smaller companies like Netflix should take a threat like Amazon seriously. Even if Amazon slows its investments in streaming media or takes a loss in this division, it still has additional areas to draw funds from to reinvest in streaming media if it chooses, so the company won't lose many investors. Netflix doesn't have this option and must maintain and meet earnings estimates much more often.
What Else is Amazon Up To?
In addition to increasing its hold on the streaming media market, Amazon is about to enter the smartphone market. Competing with tech giants like Google, Microsoft, and Apple, Amazon may have taken more than it bargained for. Unlike streaming media where customers may choose to sign up for both Amazon Prime and Netflix, for example, most people only buy one smartphone at a time. Also, streaming media generates continuous profits with each download, whereas smartphones are a one-time purchase.
With Apple rumored to release the iPhone 5 during Q4 2012, along with the upcoming release of Windows 8 OS (featured on the latest Lumia phones from Microsoft), Amazon will not only have to make a name for itself in this highly competitive arena, it will also have to contend with well-known brands (Google Android OS still reigns supreme) that consumers automatically flock to.
Investing in Amazon Still a Good Idea
I believe investing in Amazon is still a sound bet when playing the stock market. With a diverse portfolio, high sales/revenue earnings, and a willingness to take on competitive markets, this company will continue to perform. Currently trading at $236 per share, the stock price remains relatively steady. This should give investors some confidence. I also believe that even if the company fails to make a huge impact in the smartphone market, it has enough income streams to recoup any losses in that sector. And even though analysts remain divided when it comes to investing in Amazon, I think in the long-run, this company is worth hanging onto. Investors should only consider investing elsewhere if the company develops a streak for poor business strategies. For example, if Amazon cannot make a place for itself in the smartphone market by the end of the first quarter of 2013, but continues to try, investors should perhaps consider making the move to another company. But given Amazon's past endeavors, this scenario is unlikely. Worst case, the company leaves the smartphone market and moves on to bigger and better projects.
Investing in companies that take on new challenges such as entering highly competitive markets would give any investor reason to rethink their investments. But with Amazon's track record of increasing profits while keeping costs low, investors shouldn't worry about it too much. It's important when investing in a stock like Amazon to think long-term. Innovation and trying to meet consumer demand are cornerstones of this company. From providing the latest movies and television programming to developing new products consumers will hopefully enjoy, Amazon continues to impress.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, Microsoft, and Netflix. Motley Fool newsletter services recommend Amazon.com, Apple, Google, Microsoft, 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.If you have questions about this post or the Fool’s blog network, click here for information.