Amazon.com, Inc. (AMZN) or Netflix, Inc. (NFLX): Who Wins In This Key Space?

Last Thursday, Amazon.com, Inc. (NASDAQ:AMZN) announced another new video content deal for its Prime Instant Video service. This time, Prime Instant Video will add a variety of shows from Comcast Corporation (NASDAQ:CMCSA) unit NBCUniversal. The series being added to the service include Grimm, Covert Affairs, Hannibal, and Smash. With these new content additions, Prime Instant Video now includes more than 40,000 movies and TV episodes.

Amazon.com, Inc. (NASDAQ:AMZN)

Amazon.com, Inc. (NASDAQ:AMZN) has been investing a lot of money in Prime Instant Video content recently, in an attempt to catch up with Internet video leader Netflix, Inc. (NASDAQ:NFLX). Earlier this year, analysts estimated that the Netflix content library was at least double the size of Amazon Prime’s library . However, Amazon is quickly closing the gap, due to its own heavy investments and Netflix’s focus on “curated” content: i.e., emphasizing exclusive access to a smaller number of high-quality titles rather than a broad catalog.

As Amazon.com, Inc. (NASDAQ:AMZN) starts to rival Netflix in terms of the breadth of its offerings, the company could start to steal market share from Netflix, Inc. (NASDAQ:NFLX). With Netflix stock seemingly priced for perfection, a slowdown in growth caused by competition from Prime Instant Video could catalyze a massive correction.

Prime catches up
Amazon.com, Inc. (NASDAQ:AMZN) launched the Prime Instant Video service in early 2011 with around 5,000 titles. The content library has grown rapidly since then, hitting 9,000 movies and TV episodes by July 2011; 17,000 by March 2012; 30,000 by December 2012; and 40,000 today. Netflix, Inc. (NASDAQ:NFLX) CEO Reed Hastings admitted last month that Amazon has been bidding much more aggressively for content over the past year.

While Amazon.com, Inc. (NASDAQ:AMZN)’s video content library is growing rapidly, the same cannot be said for Netflix anymore. On May 1, Netflix added more than 500 new titles, but at the same time it lost nearly 2,000 movies. Netflix, Inc. (NASDAQ:NFLX) also disclosed in its first-quarter shareholder letter that it will allow a broad licensing agreement with Viacom, Inc. (NASDAQ:VIAB) to expire at the end of May.

A focus on quality
Instead, Netflix will try to acquire exclusive streaming rights for a few of the departing MTV, BET, and Nickelodeon shows. Netflix management has repeatedly stated in recent months that it would prefer to focus on exclusive arrangements rather than trying to offer a comprehensive catalog. While it costs more to license titles on an exclusive basis, Netflix, Inc. (NASDAQ:NFLX) believes that the best way to differentiate itself is through quality, not quantity.

This shift in strategy seems to be correlated with the entrance of Amazon and Hulu as active bidders for content.  Netflix probably realized that it would be drawn into an expensive bidding war if it committed to staying ahead of its rivals in terms of the number of movies and TV shows available.