Netflix v Amazon - will digital downloads steal the crown?
- Summary:
- Amazon's parked its video tank firmly on Netflix's lawn with a new monthly subscription offering. It comes at a bad time for Netflix with some downbeat predictions of new subscriber numbers for the coming months.
It hasn’t been the best of weeks for Netflix. Not only did it turn in some lacklustre numbers yesterday that sent its share price slumping, but that came after Amazon firmly parked its tanks on Netflix’s lawn with a new monthly subscription option for its rival content streaming operation.
Rather than the wider annual subscription, Amazon Prime Video is now offering monthly sign-ups of $8.99, lower than Netflix’s comparable standard rate. And Amazon has one big differentiator that Netflix lacks - you can download licensed movies and TV shows onto your phone and laptop, and watch them offline.
The video operation is the first part of the $99 a year Amazon Prime service to be spun off as a standalone business in the US, away from the rest of the bundle of unlimited free delivery and music streaming, although Prime Video has been available as a monthly subscription in the UK since 2014.
In reality, for now at least, the likelihood is that the two services will co-exist, with subscribers looking to extend the amount of streaming content available to them. Differing original content - such as House of Cards for Netflix and Transparent for Amazon - will also encourage viewers to be flexible in their choices.
Size will matter of course. It’s all about the biggest library in the end. That’s where the risk arises of a competitive bidding war. It’s started to be seen. For example, Amazon in the US has recently splashed out on the rights to Doctor Who, taking those off of Netflix and becoming the only source of streamed episodes open to US audiences.
That said, the Amazon move is unfortunate timing for Netflix. Two years ago, it bumped up its US pricing from $7.99 to $9.99, but let existing users hold on to the old rate for 24 months. That runs out this month, so the subscriber base is about to see a hike in its cost.
On the upbeat side, the firm added 6.74 million subscribers in the first quarter, beating its own estimate of 6.10 million. This uptick was attributed to international expansion, with the firm opening up 130 new markets.
On the downbeat side, the number of projected new international subscribers for the second quarter is set to crash to around 2 million, while in the domestic US market, second quarter projections are to add 500,000 new subscribers, compared to 900,000 in the comparable quarter last year.
Overall, the firm did turn in a profit of $27.66 million for the quarter, compared with $23.7 million a year earlier. But running costs are rising - the firm intends to spend $6 billion on that all-important original content this year, up from last year’s $5 billion.
Global reach
For his part, Netflix founder and CEO Reed Hastings sees increased competition as an inevitable and natural evolution from linear to Internet TV:
There are so many competitors, and everyone is working hard to build the best content. And so, we're seeing growth in the overall Internet TV market. Of course, that's displacing linear TV, and it's natural that everybody is coming in as they realize that the future is Internet TV.
Hastings pitches Netflix international footprint and focus as a primary differentiator:
We're very focused on global competition. Obviously, around the world, it's very fast growing for us. We're coming towards 50/50 international/domestic revenue. We're focused on content that we can have around the world, which is why we're investing in original movies, original series so that we can have that content and also producing around the world like our French series Marseille or Spanish in Narcos.
That's very different from carrying other people's single nation networks. That's just a very different business. It's not one we focus on a lot. We know what we want to be, which is a great global producer and distributor of content, and other people will do other things and that's fine. They may be very successful.
He points to the likes of Facebook and YouTube with a user breakdown of around 80% international, 20% US domestic as indicative that there’s a long way to go yet to achieve that sort of balance:
When you think about it in the long term, everybody around the world is going to be watching Internet video, and we want to be well-positioned, so [that] as all of these countries evolve towards Internet video that we grow with them. In some cases, that will be 10 years, 15 years, in other cases it will be in the next two years or three years. But it's a long-term investment, and country by country, it's worked out extremely well for us. That's why we're so invested in international expansion. We're very confident that in the long-term, everybody is going to be watching TV shows and movies over the Internet.
That’s why that bump in the content creation budget is essential, says Hastings, citing new productions such as The Crown, a forthcoming drama based around the life of Queen Elizabeth II. It’s worth the price, he insists:
People talk about the growing content spend. But what we're able to do is find the shows and get the shows that we want, and we do have to pay a lot for them. But they're really spectacular, what we're doing. I think when you see Orange is the New Black, when you see The Get Down, when you see The Crown, you'll know why we're investing what we do.
As for that downloadable differentiator from Amazon Prime Video, Hastings suggests that this is a possible development, particularly in markets where internet connectivity isn’t as robust as in the US:
We should keep an open mind on this. We've been so focused on click-and-watch and the beauty and simplicity of streaming. But as we expand around the world, where we see an uneven set of networks, it's something we should keep an open mind about.
My take
That downloadble factor is something that should be given serious attention very soon. I can carry my iTunes content with me and can download from the BBC Store and from BBC iPlayer, as well as my Amazon Prime account. For Netflix, I need to have wifi on tap and that’s a seriously limiting factor.
But the content is king of course. I hang on to my Netflix account for House of Cards and Orange is the New Black and so on. I’m a perfect example of the kind of multi-service customer that Netflix needs to hope will continue to part with cash for different offerings simultaneously. At current price points, I’m not likely to dump any provider proactively.
For all the downbeat talk around Netflix yesterday, it’s important to acknowledge the good points as well. The firm has 81 millions subscribers worldwide, making it likely that it will push through the 100 million mark sometime next year. Amazon Prime Video will be playing catch-up for a while yet.