Is Amazon vs. Netflix David Against Goliath?

Despite its recent success at the Golden Globes – and a concerted effort to raise its game – Amazon vs. Netflix is still very much David against Goliath. David does eventually win however…

When you think about Netflix from an industry perspective – looking at its operations, marketing, product and business strategies – it’s natural to place Amazon Instant Video in the same bracket. In most countries where they’re both available, these are the two dominant, independent SVOD (and in the case of Amazon, e-commerce) services. They hoover up domestic and international content rights, have platform ubiquity and aim to be the stand-out, most name-checked, competitors to linear and catch-up products.

Look at the numbers a little more closely however – especially in relatively advanced VOD countries – and you get to understand that Amazon is nowhere near Netflix. In the US, for example, Amazon video has, at best, a maximum of 25m Prime Instant Video viewers whereas Netflix has 49m domestic customers. Amazon accounts for 2.6% of all downstream internet traffic while Netflix’s share is a whopping 34.9%. And reports suggest that of the big three (Netflix, HBO and Amazon) Prime Instant Video is the one least accessed by consumers – only 3 million members have watched all of the episodes of Transparent compared to 12 million Netflix subscribers who have watched the entirety of Orange is the New Black.

However a series of recent events, including high profile content deals, an increased focus on the production of original programming and rumours that Prime Instant Video may soon be available with advertisements indicate that Amazon is getting serious about trying to close the gap between itself and Netflix. How is it doing this? Some thoughts below.

#1. Content

#a. Content Spend

Amazon and Netflix compete fiercely to offer their customers the most premium programming but there’s a big difference in the spending habits of the two companies. The most recent estimates we can find indicate that Amazon commits around $1 billion a year for all its content acquisition compared to Netflix which spent triple that amount in 2014. Indeed, last week Netflix announced it was raising an additional $1.5 billion in long term debt purely to fund future content purchases.

Back in 2013 Netflix made history when it became the first online TV platform to win an Emmy for its political drama House of Cards. Since then the company has accelerated the number of original series it produces – and in doing so the number of trophies is has in its award cabinet – with Chief Content Officer Ted Sarandos commenting last year that he aims to offer customers a new title every two and a half weeks. Whilst Amazon has begun to make headway in producing its own content, it’s still lagging far behind. The service only offers seven original shows, compared to Netflix’s eleven series, five adopted and continued shows and forty-three specials, miniseries and films.

#b. Commissioning Models

Both companies employ two different selection models in order to commission their exclusive content. Netflix is famed for its ability to examine the data it collects from its customers, analysing every click, swipe and button press in order to decide the titles it produces. Amazon however gives the power to the viewer, hosting pilot seasons several times a year where consumers can vote on which shows get picked up for future series’. It’s still too soon to predict which model yields the best results – both have created hits and flops – but Amazon’s recent Golden Globe win for its drama-comedy Transparent shows that Netflix is no longer the only web-TV service capable of creating award-winning titles.

#c. Buying Existing Content

Whilst huge budgets have been set aside by the companies to produce their own content – Amazon invested $100 million in Q3 2014 alone; Netflix committed 10% of its overall global content funds in 2014 – it is still a fraction to that spent on licensing programming from broadcasters and other producers. Analysts estimate that collectively both services will invest $5 billion on syndicated programming in 2015.

In this department the e-retailer is also lagging behind, offering customers only 12% of the top-rated US television shows in its catalogue compared to the 32% provided by Netflix. This shouldn’t come as a surprise. Netflix has been in operation since 1997, giving it a significant head start over its competitor in forging relationships with the big studios. Amazon is starting to catch up however. In recent months it has inked major content deals with Starz Digital Media, Freemantle Media and Entertainment One amongst others, whilst Netflix was dealt a blow in January by failing to strike renewal content deals with Discovery and Hasbro. One of the most notable content wins for Amazon came last year, when it became the first online-only subscription TV service to offer HBO programming in the USA.

#d. Disrupting Distribution Models

Both companies have also announced plans to move into film production, much to the dismay of cinema chains. Distribution models will change as a result. Netflix aims to do away with the exclusivity window held by the theatres, releasing its movies simultaneously on the streaming service and in bricks and mortar cinemas. Amazon on the other hand will offer an exclusive 4-8 week theatrical window before the titles hit Prime Instant Video. It will be interesting to see how these decisions affect the current content distribution chain and how hard the cinemas will fight back. Historically, theatre owners have tried to protect the window between when a movie opens in cinemas to when it’s available on demand in order to avoid a drop in attendance but I’m thinking that if they have to make a choice between one or two months exclusivity or none, they’ll almost certainly take the former.

 #2. Strategy / Subscriptions

The massive difference in subscriber numbers and bandwidth usage between the two companies could simply be attributed to the nature of both businesses. Netflix deals exclusively in online video so can commit more resources to growing its product, whereas Prime Instant Video is just one part of Amazon’s total offering. There’s also geography to consider. Netflix aims to have a presence in around 200 countries by 2020, announcing its first venture into Asia recently with a Japan launch towards the end of 2015, whilst Amazon’s streaming service is currently only available in five locations, with no further announced plans for international expansion.

But Netflix faces a problem namely, how it will continue to grow once it has reached its saturation point? There are only a finite number of potential subscribers who will sign up to the service (the company itself says that domestically it’s in the “middle section of the S curve of consumer adoption” – see second link on this page) and when Netflix reaches this number it will be forced to either raise subscription prices, and risk alienating its current user base, or introduce alternative payment models in order to simply keep up with its growing content spend. This is where Amazon has the advantage.

Prime Instant Video augments its SVOD business with TVOD – transactional video-on-demand – where new releases in the first-pay window can be bought individually and played within the service. This is a segment of the market that Netflix has been, thus far, unwilling to explore. With TVOD revenues expected to hit $4.6 billion by 2020, this strategy gives Amazon an opportunity to generate additional revenues outside of just a flat subscription fee.

There have also been reports that Amazon is planning to launch an ad-supported product in 2015. There’s no corroboration of this yet from the company itself but it’s interesting to consider how this decision could cut into Netflix’s market share.

The downsides? First, Amazon does have prior experience in using an AVOD model but only for a very small percentage of the company’s overall content catalogue. To institute a full-scale ad-supported model it would have to renegotiate all the content deals it currently has in place which could prove to be a logistical nightmare. Second, isn’t the wind blowing against AVOD and toward SVOD consumption? A 2014 study by Ericsson conducted over 23 markets (including the US and the UK and with 23,000 survey respondents), for example, found that 50% of consumers believe that “removing commercials is very important” and almost 30% are willing to pay to get rid of them.

#3. Product / Technology

Both services are available on all of the big platforms and offer device synchronisation functionality – a viewer can start watching House of Cards on their smartphone whilst travelling home from work and pick up where they left off on their smart TV after dinner – providing users with a uninterrupted viewing experience. This is good, but also where the similarities end. Whilst Netflix looks and feels the same across all platforms, Amazon is let down by the inconsistency of its UI, resulting in a clunky and disjointed product.

According to data in our Video User Interface Library, where we track the presence (or not) of 35 functions that commonly appear in VOD services, Prime Instant Video scores an average of 16 across devices compared to Netflix which scores just 14. On the surface this would seem to suggest that Amazon has the better product. In our tests however we found Prime Instant Video difficult to navigate and prone to constant streaming and buffering issues especially across smart TV apps. This is a problem; research from Ooyala’s Global Video Index (Q3, 2014) suggests that connected TVs see the greatest percentage of long-form content consumption, with viewers spending 80% of their total time on the device when watching videos that are longer than 10 minutes.

We know that content is important, however it has to be backed up by a stable and easy to use product in order to keep to customers happy. Amazon’s focus seems to have been to launch its service on as many platforms as possible in order to compete with Netflix, which is fine, but now it needs to go back and revaluate its offering, asking the following questions:

  • Is it as easy as possible for users to discover and watch content?
  • Can Prime Instant Video handle heavy usage without crashing?
  • And how can we provide a more consistent user experience across devices?

Conclusion

Prime Instant Video is still a long way off from being Netflix’s equal, and has a lot of work to do in both bolstering its content catalogue and improving its end product before it can hope to achieve any kind of parity with its main competitor. But there is potential. Amazon announced in its earnings report last week that it had spent $1.3 billion on its video service last year, a figure only set to grow, and has around 244 million active users of its e-commerce business many of whom, the company must surely believe, could be Prime Instant Video customers. If Amazon continues to produce and air the right content, win a few more accolades for its original shows and movies and polishes up its player, there isn’t a reason why it couldn’t be the David to Netflix’s Goliath.



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