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Amazon (AMZN) Goes on the Offensive Against Netflix (NFLX)

By: , dated June 4th, 2013

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).

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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.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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