E-commerce giant Amazon (AMZN) recently announced that it plans to release five new exclusive television series for its Amazon Prime Instant Video service later this year. For most industry watchers, this is a direct response to Netflix (NFLX), which also started producing its own lineup of exclusive shows, such as House of Cards. Both Amazon and Netflix, which offer streaming video of network television shows, are required to pay considerable royalties to content providers such as Walt Disney (DIS), Time Warner (TWX), Viacom (VIA) and Comcast (CMCSA). Daily Chart Back in April, Amazon made its intentions clear when it offered 14 pilot shows and asked users to vote for the best ones. Amazon's announcement that five new shows are on the way comes less than a week after Netflix's release of 15 original episodes of cult favorite sitcom Arrested Development. Amazon and Netflix's recent strategies have elevated the content pricing wars to a new level. Last year, Netflix lost over 1,000 films from its streaming library after failing to reach a royalty settlement with cable network Starz. Netflix's prior contract with Viacom also recently expired, which means that it will lose some major kids shows such as Spongebob SquarePants and Dora the Explorer. Due to similar contract expirations, Netflix's library of shows and movies shrank by over 3,000 titles last year. However, some analysts are wary of Amazon and Netflix's determination to go up against media giants such as Disney and Time Warner, which can afford much higher production budgets which have a safer return on investment from advertising. Amazon and Netflix's original content must generate revenue through streaming subscriptions. Analysts have noted that the handful of titles that Amazon and Netflix are offering will not replace the lost revenue from expired contracts that result in the loss of titles such as Spongebob SquarePants. OptionMONSTER analyst Jon Najarian goes a step further to suggest that Amazon and Netflix are attempting to "confuse the investor." While creating original content sounds good on paper, the investment in television shows that could fail is an extremely risky business. For Amazon, it could offset the gains made by its core e-commerce business, while Netflix's subscription revenue could be drained by production expenses. For example, a year of Netflix's monthly subscriptions generates $72 of revenue per user. It cost the company over $100 million to produce House of Cards. When the two companies are directly compared, Netflix has a lot more to lose than Amazon. Amazon can always fall back on its primary business of e-commerce if these new shows fail. Amazon shareholders are also generally more forgiving than Netflix investors for poorly timed investments or a lack of quarter to quarter profitability. Other News About AMZN 'Arrested Development' Abust? Netflix Laughs Off the Critics Did Netflix make a costly mistake? Aggressive Development: Amazon Takes on Netflix Amazon sets its sights on taking down Netflix. Other Stocks in the News Is It Time to Invest in Specialty Grocers? Are alternative grocers are good investment? Three Ways to Invest in the Philippines Should investors pay attention to the Philippines' rapid growth? Copyright 2013 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.
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