Friday, February 25, 2011

Amazon Enters Subscription Video On Demand To Challenge Netflix

This post from last December concerning Netflix. In it, I wrote,

"For example, HBO, according to Faber, has recently lost more than one million subscribers to Netflix's instant video content viewing. With so many titles available to stream to computers and/or download to DVRs, HBO's value as a separate paid service is dimming.

Netflix is reputed to be responsible for as much as 25% of web traffic during prime hours, as vast amounts of video content is viewed via streaming.

I'm guessing that, if Netflix were part of the S&P500, It would have made appearances in my equity portfolios by now."

Earlier this week, Amazon announced a subscription service for video on demand for its best customers.

This is not surprising. I find that successful firms which earn consistently superior total returns for a certain periods tend to fail to do so anymore for one or more of three reasons: competitive reactions, inability to continue to surprise investors, or regulatory reactions.

In Netflix's case, it's the first. Amazon has seen the effects of Netflix on Blockbuster, HBO, and probably Amazon's own business of selling DVDs. After arranging the logistics of offering a similar service to their best customers, Amazon is now moving to limit Netflix' inroads into its business.

It's a natural response to a very successful business model. Just like we see competing tablet products coming forth to compete with the iPad.

I'll watch with interest to see if Amazon can actually dent Netflix' volumes, profits and stock price. Chances are, it can. Plus there are some critics of Netflix' accounting, including CNBC contributor Herb Greenberg. The details escape me, but he disagrees with the firm's capitalizing some expenses. If their growth rate falters due to Amazon's moves, and profits are squeezed, then we might see an even faster decline due to an inability to continue whatever aggressive accounting practices are in place.

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