Amazon’s Strategy to Undermine Netflix’s Streaming Media Business

by JT McGee

So the web is abuzz about Amazon’s new streaming movie service designed to take on Netflix in a bitter war of who can get the most subscribers and the biggest library for the world’s next digital media transition.

While the back and forth between Amazon and Netflix is interesting from a corporate overview, more attention need be paid to the strategy Amazon employed to steal this market right out of Netflix’s hands.

Amazon vs Netflix streaming media

Amazon Prime: How it Works

Amazon’s new streaming media service is solely for Amazon Prime customers. Prime is paid status that costs some $79.99 per year and allows all Amazon customers free 2-day shipping on all products shipped from an Amazon warehouse with the option to upgrade to overnight shipping for just $3.99.

That’s a pretty good deal in itself; however, the best is still yet to come: prime customers can now enjoy a library of 5,000 movies for instant streaming. That puts Amazon’s library close to the Netflix library in size, with a few minor exceptions: Starz and Epix won’t be found on Amazon’s new streaming deal, and neither will ABC nor NBC TV. Of course, ABC and NBC TV shows are already free with Hulu.com

Amazon’s Aggressive Strategy

Not only is Amazon taking on the leader in this space, but it is doing so with a strategy that I believe to have been devised several months ago. The company opened up a free year of Amazon Prime to any college student (or anyone for that matter) with a .edu email address in July, 2010. That move allowed the company to enter the college textbook market like gangbusters.

But was the free Amazon Prime about more than just texbooks?

It appears that yes, in fact, it was—it was an excellent way to roll students into Prime, expose them to the awesomeness of 2-day shipping and then “WHACK!” throw a hard-sell proposition of extra value added—streaming content—just a few months before those free, one-year trials ended.

Not only has Amazon now effectively cornered the textbook market, the collegiate online shopping market, and soon the online textbook rental market (yeah, they’re doing that soon, too), but they’ve also cornered the market for digital media among 20-somethings. And yes, we do consume a lot of media.

Netflix Demographic Data

Unfortunately, collecting data on the internet can be a pain in the bum. For one, online purchases cannot be made in cash, thus anyone who does any ecommerce transaction is at least 18 years old by official measure. Obviously there are exceptions—I’ve been 18 on the internet since I was twelve!

I could use Alexa, but seeing as it is weighted toward webmasters it also skews younger, whiter, and more toward the male end of the spectrum.

Anyway, here’s what I found out about Netflix’s average customer:

  • Over 35 female
  • Family income of $75,000 or less

Not as enlightening as I had hoped, and unfortunately the data is older than dirt, as far as statistics go. (The 2006 article).

I still think we can draw three broad conclusions:

  • That data is mostly accurate today as expansion of Netflix streaming to Wii probably aged their customer substantially.
  • Netflix customers are “older” as far as electronics go
  • The “older” age of a Netflix customer is likely the result of an inability for many minors to shop online, so those who use Netflix the most are probably not the same people who pay for it.

Smart Thinking, Amazon

Amazon obviously realizes where the easy growth is: the younger end of the market.

In the coming years we will see, I believe, a net reduction in the age of the average digital media subscriber as the billing statements start coming in the name of the Y generation instead of their baby-boomer parents.

Amazon found a perfect niche in media consumption; hit Gen-Ys pocket the second they transition from living at home to living at school/going to school/making more of their own decisions about where they allocate their money, and do so with a deal Netflix can’t match: free shipping on online purchases, and a mostly similar online library of free-to-stream content at a lower price.

Should Netflix Re-Evaluate Streaming-Only Delivery?

I have to question what this means for Netflix. Given their desire to cut to the cord on DVDs-by-mail, Amazon has definitely thrown a fork in any future projections.

  • If you’re Reed Hastings, do you forgo the $1 billion in annual cost-savings in postage for the last remaining value proposition you have?
  • Or do you go for broke, instead accepting that you’ve effectively locked down enough of the streaming devices (Wii, PS3, Xbox360) and thus enough of the market? But wait, why can’t that the company that made the Kindle make a media player?

I wouldn’t want to be making that call. But if I had to, I’d say, “keep the billion, we’re sticking with DVDs.” It’s Netflix’s last card, and they have to play it. Media is what it has always been: a race to the bottom.

Questions for readers:

Are you currently an Amazon Prime/Student member? Do you use it? Will you use your membership for online streaming of media, too?

What would you do if you were Netflix CEO? Would you be worried? Maybe reconsider the switch to a streaming-only model?

{ 9 comments… read them below or add one }

101 Centavos February 22, 2011 at 22:50

Interesting and in-depth analysis… I wasn’t aware of this latest from Amazon. We’ve had Prime for sometime, and it’s paid off well.

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JT McGee February 23, 2011 at 11:29

I’m a Prime member too, and I use it like crazy. Sometimes I’ll think to myself “but it costs less than $25, I won’t get free shipping!” before remembering that not only will I get free shipping, but it’ll be here in 2-days. 😀

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Squirrelers February 23, 2011 at 00:48

Informative, JT. I can tell you that I do enjoy Netflix, but this Amazon Prime Deal seems interesting as well. Personally, and this is a quick assessment, but I’m forseeing further price pressure here, as these entities compete with each other in this space.

What’s interesting is how a year ago, people were talking up Redbox. I enjoyed that at the time, but don’t use it anymore. Streaming fits my needs better.

Things keep changing at faster and faster rates.

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JT McGee February 23, 2011 at 11:31

There’s definitely future price pressure ahead. If Amazon Prime is roughly $80, and Netflix costs $96 per year for streaming-only, something has to give.

Yeah, funny how quickly Redbox died out. They’re actually going to attempt an entry into online content, as well. Too little, too late.

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Pete April 2, 2011 at 18:08

I still use Redbox in conjunction with our Netflix account. We use Redbox as kind of a movie rental store replacement for those times that we just want to rent something that night without having to wait a day or two for the Netflix movie to arrive. Of course once Netflix has more new releases earlier this won’t be as much of an issue and could be a problem for Redbox – which is why i’m assuming they’re jumping into the streaming game.

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JT McGee April 4, 2011 at 21:41

Makes sense. That’s how we’ve been using ours as well. I’m particularly interested to see what Netflix does with 1) its quicker releases and 2) original content. Should be interesting.

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Car Negotiation Coach February 23, 2011 at 21:39

JT, I must have been asleep the past few months cause this is all news to me about Amazon. But I always love to see a little competition (it can only help the consumer). I’m a Netflix user myself, but I’ll be checking out Amazon now as well.

I actually read something a few months ago that some of Netflix’s licensing agreements were coming to a close soon and that they were likely to be renegotiated in not so favorable a way for Netflix since they somehow managed to get a too good to be true deal the first time….we’ll see what happens.

I find the whole evolution of movie watching very interesting…..I actually predicted the demise of walk-in Blockbusters stores about 10 years ago. My next prediction is that you won’t be able to tell the difference between a TV and PC in 10 years other than screen size and permanent location versus portable.

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JT McGee February 23, 2011 at 21:59

It’s been rumored that Amazon was going to launch this service for…oh, maybe a month or so, but only yesterday did such rumors become reality.

I 100% agree with your prediction about TV and the PCs. I would probably put a longer timeframe on it if it weren’t for the cable companies, but they’re killing off TV so fast it isn’t even funny. Also, the number of TVs with internet browsers is exploding, so it only makes sense to me that the two will blur together. This space is probably one of the more interesting; it seems that every decade the whole business evolves entirely.

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stephen April 28, 2011 at 13:11

We gave up Sky+ Tv over 6 months ago now and bought a humax fox-freesat pvr box, we get all the free to view channels and i also have freeview built into my lcd tv, the humax can record just like sky plus but without the cost, plus now i can stream bbc iplayer and itv player through the humax, although i still use my laptop connected to my tv for that,lol
But there are so many options now that it does not make much sense to be paying sky tv or your cable company a huge sum of money every month!for instance i use a 1tb media streamer that i am going to store my dvd collection on and i also stream to that from my laptop for the tv shows i have.

Plus if you have an xbox 360 or ps3 you can stream and watch on demand content,the possibilities are endless and it is only going to get better in the future:)

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