By now, it’s obvious that Amazon (NASDAQ:$AMZN) is on a rampage. However, contrary to popular belief, it might not be enough for the e-commerce giant to get its hands on Netflix’s (NASDAQ:$NFLX) business. Netflix has soared to new highs as of late, and for now it seems that the California-based company remains mostly immune to Amazon’s incursions – at least that’s what their earnings report is suggesting.
There are two ways to go about approaching this situation: For starters, we can see that Netflix’s strategy of fending off Amazon looks all the more stunning once we realize that a large percentage of Netflix subscribers already have access to the Amazon service that competes against the company through Amazon Prime subscriptions. Second, Netflix’s fending off strategy appears a little less stunning when one stops looking at Netflix’s ongoing battle with Amazon as a zero-sum game.
Reed Hastings, the CEO of Netflix, has long insisted that Netflix has numerous competitors other than other subscription streaming services. According to Hastings, Netflix is also competing with video entertainment options, and, to a certain extent, other entertainment options like music and gaming. In fact, Hastings has even gone as far to suggest that Netflix is “competing with sleep on the margin.”
In the context of video entertainment options, Netflix remains a fantastic deal. For $10 a month, consumers are able to get access to a large on-demand library of ad-free (and virus-free) shows and movies. Don’t forget that all of the material is available in HD on virtually any device. Plus, if Netflix is willing to sacrifice HD streaming, the price could drop to $8 per month.
Taking all of this information into consideration, the fact that Amazon has its own streaming service doesn’t necessarily motivate consumers to cut their ties with Netflix. As a matter of fact, in a recent survey conducted by Morgan Stanley, 60% of respondents said that they were both Prime members and Netflix subscribers. On the other side of the equation, 45% of Netflix subscribers reported using Prime Video. In response to the numbers, Benjamin Swinburne from Morgan Stanley stated: “We believe the debate over Netflix vs Amazon is less relevant compared to Netflix’s broader opportunity to grow its share of consumer spend and time spent on entertainment.”
While Cowen estimated in November of 2016 that Amazon had close to 50 million U.S. Prime members, Netflix has recently reported that it finished the second quarter with 51.9 million U.S. streaming subscribers. The data suggests that U.S. household penetration rates are in the 40% range and with both Netflix and Prime’s demographics heading towards higher-income households, there is clearly tons of room for U.S. customer overlap.
With all that being said, there are numerous reasons as to why Netflix shows no signs of getting ‘Amazon’ed’. For instance, many speculate whether Amazon can financially justify keeping pace with Netflix’s spending. Even though Amazon’s total retail subscription service revenue totaled $6.39 billion, that figure is still behind Netflix’s 2016 revenue of $8.83 billion (up 30%).
In 2017, Netflix is expected to see its revenue grow by another 30% to $11.5 billion. Seeing as the company will be leveraging that extra revenue to keep increasing its content spend, and using its unmatched trove of viewing data to both make better content investments, catching up to Netflix will be quite difficult for any competitor.
While Amazon deserves some credit for putting itself within striking distance, it’s important to keep in mind that in this market, there’s a difference between being “competitive” and catching up to the leader.
Featured Image: twitter
