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May 9, 2016

The Disruptor is Now the Disrupted

A Netflix Original

There was an earthquake in the content delivery market last month. If you weren’t paying attention, you might have missed it. But Amazon announced a subtle change to its video delivery service.

It will now offer a standalone service in direct competition to Netflix, and it will undercut Netflix’s price by a buck a month.

Why is this significant? Two reasons.

First, and most importantly, Amazon takes the long view on making a profit. In other words, Amazon often doesn’t make money, although they just reported record quarterly profits. But what they do do is to rack up users, eyeballs, consumers and revenues on an unprecedented scale. So Amazon, which also announced that it has 4 times the movies that Netflix has, will almost certainly continue to undermine and undercut Netflix’s profitability and user base. For Netflix, this is an existential threat in the long-run.

Second, these services are virtually indistinguishable. Yes, Netflix’s user interface and algorithm is slightly better than Amazon’s, which is clunky and kludgy. But once a program is showing, you tend to forget which platform you’re on. And all of Amazon’s technology challenges can be fixed without too much trouble. So brand loyalty is a dicey proposition.

That’s where the original programming comes in. Whether it’s House of Cards or Orange is the New Black on Netflix, or The Man in the High Castle on Amazon, this type of original programming is the only thing that really distinguishes the offerings. But here too, there’s precious little distinction. They both have come to embrace white glove, high-end shows in the style of the Sopranos and Mad Men. And now you’re seeing other services like Hulu join in with 11.22.63 and YouTube can’t be far behind.,

So what’s to stop Netflix and Amazon video from engaging in a price war? Nothing. In fact, I believe that’s precisely what Amazon wants to do. These two companies have fundamentally different business models. Netflix is a classic subscription service. The more users they have, the more revenue and profit they make. If you squeeze the profitability out of the service, you do real damage to their long-term prospects.

Whether it’s House of Cards or Orange is the New Black on Netflix, or The Man in the High Castle on Amazon, this type of original programming is the only thing that really distinguishes the offerings.

Amazon, however, wants to be a closed platform, what used to be called a walled garden. They want you and me and everyone else to spend all of our time on Amazon properties so that we buy more goods, faster and easier. The Amazon Echo is the perfect example of this. Amazon wants to be your everything – from search, to purchases, to video and entertainment.

What’s more, with their cloud service (AWS – which is where they really make money), they win either way. The more video that moves in and out of the Cloud, the more their service is in demand.

Netflix is a classic disruptor. Their original service – DVDs through the mail – provided access to the entire catalog of movies and games at much less cost, with less frustration and late fees, than Blockbuster or Hollywood video (remember them). The real value of the service was their amazing logistics system, which delivered videos to you overnight.

But when they moved almost entirely online, it was a two-edged sword. More people joined their service, but there was nothing unique about what they offered in the long term. That’s probably why they made the commitment to original programming.

Now the disruptor is the disrupted. It’s early, but they are in the fight of their lives. Most everyone who has gone up against Amazon has paid dearly.

So what should Netflix do. They should continue to churn out compelling programming that is must see TV. But they should also consider launching an effort to position themselves as the true leader when it comes to streaming video content, as well as explore options to ensure that Amazon is coloring inside the lines when it comes to pricing and market position. Netflix in fact should explore all legal, business and policy options at its disposal.

If they don’t, Netflix in less than a decade might be the next Borders or Circuit City. And that’s not a video that anyone wants to binge watch.

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