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Amazon.com, Inc. (AMZN) and Viacom, Inc. (VIAB) Burn Netflix, Inc. (NFLX)

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Amazon.com, Inc. (NASDAQ:AMZN) and Viacom, Inc. (NASDAQ:VIAB) came to a deal recently that will provide Amazon Prime subscribers exclusive streaming access to a slew of popular programming. The deal came almost immediately after streaming king Netflix, Inc. (NASDAQ:NFLX) allowed its contract with the media company to lapse at the end of May, and is only the latest effort from Amazon to compete with Netflix, Inc. (NASDAQ:NFLX) in on-demand streaming video.

Let’s take a look at how the deal affects all three companies.

Amazon.com, Inc. (NASDAQ:AMZN)

Viacom

Viacom, Inc. (NASDAQ:VIAB) expected to grow its on-demand streaming fees by 10% this year, and with the Amazon.com, Inc. (NASDAQ:AMZN) deal, the media company has done so. While the exact terms of the agreement were not disclosed, Amazon.com, Inc. (NASDAQ:AMZN) is said to be paying “hundreds of millions” for the content rights. That would imply at least $200 million, where the company needed just $125 million to $150 million more to achieve its goal.

The company’s total revenue fell 5.8% in the first quarter of 2013 to $3.14 billion. In the last 18 months, two of the company’s key networks, MTV and Nickelodeon, have struggled with lower ratings. That means the company is losing ad revenues.

Part of the blame is placed on content licensing deals like the one it had with Netflix, Inc. (NASDAQ:NFLX) and that it just made with Amazon.com, Inc. (NASDAQ:AMZN). Kids don’t mind watching reruns as much as adults, so the streaming platforms have cannibalized Viacom, Inc. (NASDAQ:VIAB)’s children’s programming. That’s why it’s important for Viacom, Inc. (NASDAQ:VIAB) to increase its streaming fees, which it did.

But the question is, how will they continue to grow revenue in the future? Assuming the Amazon.com, Inc. (NASDAQ:AMZN) deal is a multi-year contract, Amazon’s exclusive rights means Viacom, Inc. (NASDAQ:VIAB) will need to grow through different revenue streams … something it’s struggling to do currently.

Amazon

It was just over two years ago when Amazon added streaming video to its Amazon.com, Inc. (NASDAQ:AMZN) Prime service. What was once just a bonus offer of 5,000 free titles has grown into a selling point with over 40,000 TV episodes and movies. The Viacom deal added about 4,000 new episodes to the company’s rapidly expanding library.

One of the most widely watched genres on Amazon Prime is children’s programming. With a rather extensive kids show library already, the Viacom deal adds another 55% to the number of episodes available for kids according to Amazon CEO Jeff Bezos. These are some of the most popular and well recognized shows too – Dora the Explorer, Spongebob Squarepants, Go, Diego, Go!, and more.

Both Amazon and Viacom, Inc. (NASDAQ:VIAB) hope that these lovable characters showing up on Prime Instant Video will behoove parents to order character-branded toys and accessories with their Prime accounts. It’s a win-win for both companies if that proves to be the case, and Amazon could use those data to convince other media companies with a hand in toy sales to choose Prime over the competition.

Netflix

In preparation for the loss of Viacom content, Netflix, Inc. (NASDAQ:NFLX) made a deal with Disney last month to bring several Disney Jr. titles exclusively to Netflix, Inc. (NASDAQ:NFLX). While these titles aren’t as recognizable as the Viacom titles, they do have the Disney brand behind them, which is the gold standard of quality children’s entertainment.

Still, this Amazon-Viacom deal speaks to a much larger problem I have with Netflix. It can’t outbid the competition for programming. As a stand-alone service, Netflix, Inc. (NASDAQ:NFLX) has just one form of income – subscription revenue – compared to the multiple revenue streams at Amazon. Noticing the heightened bidding activity from competitors such as Amazon and Hulu, Netflix CEO has adopted a new strategy: only pay for top-quality content.

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