We are in the midst of a major shift in the way we consume video, just like internet revolutionized the books and music industry, video is going under a similar transformation due to the online streaming boom. There will be many opportunities for different players to profit from this revolution over the next years, but investors need to consider major industry trends in order to position themselves in the best possible way.
It´s about content
Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) have positioned themselves as industry leaders when it comes to subscriptions, and they are aggressively competing against each other for the most valuable resource in the business: high quality exclusive content.
Both companies offer a wide selection of video for a convenient price: while Netflix, Inc. (NASDAQ:NFLX) charges a flat a $7.99 per month for unlimited consumption, Amazon.com, Inc. (NASDAQ:AMZN) Prime subscribers pay $79 a year for unlimited streaming and free two day shipping on Amazon.com, Inc. (NASDAQ:AMZN) products. There seems to be little room for price competition at these levels, especially considering that content is becoming increasingly expensive.
With more than 75,000 movies and TV tittles, Netflix has a bigger library, but Amazon.com, Inc. (NASDAQ:AMZN) has been closing the gap over the last months, aggressively bidding for content and building its own collection with more than 40,000 titles. Besides, quantity for a good price is not enough at this stage, viewers are demanding quality, and this means that streaming companies are fighting each other for this valuable asset.
Original content is the new frontier in this competition. Netflix was the first mover with its much successful House of Cards, and Amazon is venturing into this terrain too with the company producing its own series through its Amazon.com, Inc. (NASDAQ:AMZN) Studios division. The race is on as original content will ultimately be the biggest differentiating factor in this harsh competition, and this has important implications for investors.
High quality original content requires enormous amounts of capital, House of Cards reportedly cost more than $100 million and, even if it was a big success, Netflix can hardly recover that kind of money with new subscribers in the short term. This is a marathon, not a sprint; Amazon.com, Inc. (NASDAQ:AMZN) and Netflix are smart enough to understand that they need to focus on gaining customers in the long term as opposed to short-term profit margins, and they are acting accordingly.
Netflix announced on Monday a deal with Dreamworks Animation Skg Inc (NASDAQ:DWA) to bring several original series to Netflix, the financial terms of the deal were not disclosed, but it seems like there is a lot of money involved, since Netflix said in its press release that it´s “the largest deal for original first-run content in Netflix history.”