Amazon dropped a bomb yesterday that must have sent chills up the spines of Netflix execs. It certainly scared the bejesus out of Netflix investors, who sold off the stock.
Amazon rolled out a video-on-demand service that's poised to compete directly with Netflix which, in addition to renting DVDs, offers a streaming on-demand service feature.
No doubt, the folks over at Netflix have reason to be concerned. Amazon is, after all, one of the largest sites in the world (there were 159 million visitors in May, according to comScore) and it boasts the "Earth's biggest selection." Amazon is a catchall site for anyone shopping for anything from lawn furniture to kitchen appliances. Netflix is not.
But here's the thing: There's still only a tiny, tiny percentage of people who stream full-length features online. (We suspect most of them are in the Wired.com office). Meanwhile, the DVD rental market is far more mainstream -- at last count, it generated about $2.1 billion in sales, according to VideoBusiness.com. Netflix is a dominant player in that space, with 8.2 million paying subscribers who must be somewhat invested in the service.
"Netflix is a little bit different than what Amazon and Apple are doing," says Jason Avilio, an analyst with Kaufman Bros. "Netflix is a subscription-based service. Right now video-on-demand is widely available -- through cable of satellite companies. In my view, the biggest asset Netflix has is its subscriber base -- they have critical mass. And when it becomes relevant to move those subscribers to a digital channel, it could be easier for Netflix."
It's not clear, either, whether Amazon is providing the streaming service for love or money. Conventional wisdom is that there isn't much money there yet.
"A lot of Amazon's initiatives are typically not about creating short-term impact," says Colin Sebastian, an analyst with Lazard
Capital. "What they're probably trying to do is increase the stickiness of their site. The more products they have, the more categories -- including digital media -- the longer their user base is going to stay on the site. It's all about creating a larger ecosystem."
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