When Netflix launched an instant streaming service for its movies and TV shows at the start of 2007, it was a minor perk for the company’s subscribers who were used to getting DVDs in the mail. Fast forward half a decade and Netflix streaming subscribers outnumber DVD subscribers by more than 11 million, and they make up about one-fourth of all Internet traffic in North America. The explosion in popularity of online streaming has simultaneously led to higher revenues and greater troubles for Netflix, as movie studios demand more expensive contracts and bigger companies begin to throw their weight around in the sector.
One such company is Amazon, which last year launched a streaming service of its own. Starting as a small feature of an Amazon Prime membership—which also provides free shipping and free Kindle ebook rentals for $79 per year—Amazon Prime Instant Video has expanded from 5,000 TV and movie streaming options at its launch to about 22,000 titles today. This week the company announced it was adding 3,000 movies that were previously exclusive to Netflix through a deal with pay-TV channel Epix. Expect to see titles like “Iron Man 2,” “True Grit” and “Transformers: Dark of the Moon” soon on Amazon’s service.
The loss of exclusivity is hardly a dagger in Netflix’s heart—the company will keep the movies too, and its library still dwarfs Amazon’s. But the online retailer’s end-game here is likely not to exceed Netflix in scope and quality, but to provide just enough features to make a Prime membership, which is $15 cheaper than a Netflix subscription annually, appealing to customers. “Not only does [instant streaming] give you an additional reason to keep subscribing, but it gives you an additional reason to stay within the Amazon environment,” says Dan Cryan, the research director for digital media at IHS Screen Digest. “You’re potentially going to turn around and buy more stuff.”
Even as Amazon racks up more movies, television remains Netflix’s key differentiating factor. As the company has been forced to shed many modern films because contracts with movie channels like Starz grew too expensive, it has beefed up its offerings from cable networks like AMC. “The TV catalogue is actually really quite good now,” Cryan says. “If you want to watch back seasons of Breaking Bad or Downton Abbey, a lot of that stuff’s available through Netflix, and you can sit there and gorge to your heart’s content on back episodes of your favorite shows.”
Still, it seems inevitable that cable licensing fees will soon begin creeping up too. That’s why both Amazon and Netflix are exploring a more viable long-term strategy in the streaming space—the development of original content. Netflix launched the original mobster drama Lilyhammer earlier this year and has more high-profile fare on deck for 2013, like Kevin Spacey’s House of Cards and the resurrection of Arrested Development. Meanwhile Amazon has thrown the doors open to screenwriters of all types and is actively soliciting scripts that it can develop into original shows.
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“That transition toward developing your own exclusive content is a fairly well-trodden path from both premium and basic ends of the cable business,” says Cryan, who noted that channels like HBO and MTV used to license others’ content but are now known primarily for original programming. “It gives people a particular reason for coming to you rather than to somewhere else.”
Of course, Netflix and Amazon aren’t the only companies angling for a piece of the streaming pie. Hulu Plus has more than 1.5 million paying subscribers, and Redbox and Verizon are partnering to offer a DVD+streaming package later this year. And of course rumors consistently swirl that Apple, which made digital media consumption mainstream, will eventually enter the space.
For now, Netflix’s narrow focus and long lead-time keep them ahead of a pack of much larger competitors. “I’m not sure with over 20 million paying streaming customers in the U.S., Netflix counts as a particularly small company in this context,” Cryan says. “It doesn’t have Aamzon’s total business, but the way they’re positioned in the market is very different. For Amazon, streaming is a free value-add essentially designed to serve the other parts of the business. For Netflix, it’s the core value proposition.”