… And Why Amazon Might be the Real Threat

Experts see Jeff Bezos' Amazon Prime ready to strike not only Netflix but also Apple.

While Netflix and Hulu battle for headlines, Amazon is hoping to outflank them by offering its subscription streaming service virtually for free. And if Netflix and Hulu aren't nervous, perhaps they ought to be.

Under CEO Jeff Bezos, Amazon is, after all, a $100 billion company with a $7 billion cash war chest and a reputation for spending the time and money necessary to build a profitable business. Amazon Prime launched its subscription-video product six months ago with 5,600 titles, and it has grown 61 percent since. With 9,000 TV shows and movies, it already boasts nearly half the content of Netflix, which had a four-year head start in subscription streaming.

Prime is actually Amazon's discount shipping service. For $79 -- which works out to $6.58 a month -- customers get stuff they purchase at Amazon.com delivered quicker and for free. In February, the streaming of movies and TV shows became a bonus. Not a bad deal, when you consider Hulu Plus and Netflix charge $7.99 for streaming only.

Amazon won't disclose Prime's popularity, but there are an estimated 5 million subscribers. Hulu Plus has fewer than 1 million. Netflix said recently it will have 25 million by the end of the quarter, 22 million of which will participate in streaming.

Prime's subscription-video add-on had been chugging along for a few months before Netflix dropped a bombshell announcement July 28 that it was raising the price of its combo DVD and streaming service by 60 percent. Some analysts figure the hike has angered a portion of Netflix subscribers so much that instead of avoiding the hefty increase by opting for Netflix's $7.99 streaming-only service, they'll dump it entirely and head for Amazon Prime, where they'll save $17 a year and get the free shipping.

"Netflix shares trade down lately whenever Amazon announces a content acquisition deal, so I'm not the only one who sees a threat," says Steve Birenberg of Northlake Capital Management.

Netflix CEO Reed Hastings addressed the threat in a recent letter to shareholders. "So far, we haven't detected an impact on our business from Amazon Prime," he wrote.

But Amazon is likely just testing the waters by tethering its subscription-video service to its Prime shipping product and will separate the two over time. That's when Amazon "will definitely threaten Netflix," says Michael Pachter of Wedbush Securities.

"I think the only question is when, and I wonder what's taking them so long," he adds.

Amazon, in fact, might have its sights set higher than on Netflix. Its endgame, says Motley Fool technology analyst Eric Bleeker, is Apple. "Amazon has its focus on becoming the digital media king, not just the streaming king," he says. "They have a longer-term focus than just about any company in America. They're willing to lose money while trying out new things for some long-term payoff."