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It should be no surprise that Amazon has entered the streaming-video market with a subscription-based offering tied to its Prime service.
The move provides the online retailer a new hook for acquiring profitable customers. But more important, it shows how the digital economy is allowing big companies to use media as a means to grow or protect legacy business models. Ironically, the same dynamic that has let Netflix flourish will also allow well-capitalized players to follow its lead. It’s only natural that new competitors will emerge — whether it’s Google looking to media to protect its search business, retailers using media as a loss leader for traffic or Apple needing media to sell more devices. The new round of players in the landscape might care less about running an entertainment business and more about using media to grow or protect their core businesses.
This is good for content owners and bad for established players like Netflix. Here’s why:
1. Healthy Competition
Competition from Jeff Bezos’ Amazon and others will boost the cost of content and increase pressure to gain and retain streaming subscribers. This could help reverse damage to existing business models created by inexpensive rental providers like Netflix and Redbox, which have marginalized the value of studio product by allowing viewers to watch content at a fraction of the historical cost.
2. Creative Windows
Just as cable fragmented the old broadcast TV audience, digital media will further fragment viewing audiences. Some subscribers want live content and the latest movies; others will accept a more limited library in exchange for lower pricing. Amazon’s service might lead some to consider whether free two-day shipping (a perk of Amazon Prime) will warrant abandoning existing platforms like Netflix. The potential for fragmentation and the flexibility of digital distribution should allow content owners to get more creative with windows to maximize the value of their assets. New windows might emerge as timing on legacy windows is modified to improve returns on investment. We should expect to see a spectrum of players in the streaming-video market, with all finding it more difficult to build a traditional mainstream subscriber base — especially because digital will make it easier to turn one service off in favor of another.
3. New Pricing Models
Amazon’s library is not as strong as Netflix’s, but this is not an accurate reflection on the platform’s potential. Netflix launched with a weak library and improved its quality over time. There is no reason Amazon and others can’t follow Netflix’s lead and cut deals with pay TV networks to improve the quality of its library. Netflix bulls will say the cost of content is too high to allow this, but we are seeing more signs of variable pricing that would lower initial content-acquisition costs for new players while increasing the cost for established players. Content owners should favor this pricing dynamic because it hedges cord cutting/shaving risk, fosters more competition for their product and prevents any one distribution player from gaining a scale advantage that could manifest as future pricing power (e.g., Apple in music).
4. Studio Control
Unlike packaged media, rights to digital content can only be acquired through deals with content owners. So each new player in the digital realm pushes the market further away from the harmful effects of the First Sale Doctrine in copyright law, which essentially allowed rental outlets such as Netflix and Redbox to obtain cheap DVDs and resell them even if the content owners objected. The move to digital will enable content owners to limit the supply of content, which should allow them to maximize the benefits from an increase in demand.
Amazon’s move is a harbinger of what could be on the horizon. Usage-based billing, new pricing models and new entrants will shape how the market evolves. Content owners retain the power because they can be more platform-agnostic and get to re-evaluate distribution deals. It’s foolish to rule out new players and business models, just as it would have been foolish to think AOL would rule the Internet based on its early subscriber growth.
Tony Wible is a financial analyst with Janney Montgomery Scott who covers media and entertainment.
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