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Why Netflix’s CEO Called Amazon “Scary”

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In the world of streaming video content, Netflix may still be the top dog, but it has identified Amazon as the one competitor of which it is most wary. Appearing on CNBC in late May, Netflix CEO Reed Hastings called Amazon “awfully scary” – a far cry from nearly five years ago, when Netflix derided Amazon’s push into streaming video content as a “confusing mess.” Here are three reasons why Amazon is now “so scary” for Netflix.

Reason #1: Amazon has unrivalled pricing power

In just about any field that it enters, Amazon can afford to be the low-price competitor. Think of books and music – there’s a reason why there are no more brick-and-mortar bookstores and independent record stores, and you can thank Amazon for that. Amazon is so efficient, so big and so global, that it can squeeze out competitors from nearly any market simply by being the low-cost alternative.\

Reed Hastings alluded to that pricing power in his interview with CNBC, in which he said that Netflix would become a “specialty play” like Starbucks, while Amazon would always play the role of Wal-Mart. He went so far as to say that Netflix wouldn’t try to “out-Amazon Amazon.” By this, he means a race to the bottom in pricing.

But is avoiding a price war even possible? Netflix is currently moving all of its subscribers to the $9.99 per month pricing plan, which is an unbelievable bargain in terms of how much content is available to watch. But as Amazon pushes into streaming video content, it could put a lot of pressure on Netflix. If you sign up for Amazon Prime Now, it’s only $99 per year – and that gives you access to Amazon’s growing digital catalog at no additional cost.

So do the math: Netflix is charging $120 per year and Amazon is charging $99 per year. As long as Netflix had a commanding lead in both the amount of content available and the amount of original content available, Netflix subscribers were willing to overlook this pricing discrepancy (especially those Netflix subscribers grandfathered in at $7.99 and $8.99 per month).

Reason #2: Amazon is pushing hard into original content

That, of course, leads us to the second major reason why Amazon is so scary to Netflix – the company is making a major push into original content. According to some estimates, Amazon has allocated anywhere from $4 billion to $5 billion for original streaming content. Amazon is buying up the best films at film festivals and commissioning new work from marquee Hollywood talent.

And now we’re starting to see the fruits of all that investment. At this year’s Oscars, “Manchester By The Sea” – an Amazon original movie – picked up a handful of Oscar nominations, including one for “Best Picture.” And now Amazon has a number of big-name programs lined up for 2017, including “Jack Ryan,” a new action series based on Tom Clancy’s CIA hero Jack Ryan (starring John Krasinski in the title role).

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And Amazon isn’t afraid to throw around cash – it reportedly spent $200 million for three seasons of “The Grand Tour,” an auto show that stars the original cast of BBC’s “Top Gear.” And Amazon is also moving aggressively into sports, which has always been an area that Netflix has avoided. This year, Amazon will pay $50 million to live broadcast 10 NFL Thursday Night football games. In contrast, just about the only original sports content that Netflix has is a competition-based reality game show called “Ultimate Beastmaster.” Which one would you rather watch?

Reason #3: Amazon is changing the video streaming business model

Lastly, one of the major reasons why Amazon is so “scary” is because it’s not a traditional competitor for Netflix. In other words, Netflix would be a lot less concerned about a lookalike competitor forced to play by the same rules as it does. But Amazon is a company that cuts across so many categories – everything from cloud computing to book publishing to streaming music to logistics – that it’s impossible to call Amazon a standalone video streaming service.

Instead, the Amazon business model is really all about e-commerce. Getting people hooked on Amazon streaming video content is just a means to an ends – getting people to sign up for Amazon Prime. Once someone is signed up for Amazon Prime, the chances are good that that person will use Amazon anytime they want to order something online. Who wouldn’t use Prime, if it’s free to have it delivered?

And, thus, just as Netflix disrupted the old moribund cable TV operators, it could be the case that Amazon is on the cusp of disrupting Netflix. That’s what truly makes Reed Hasting lie awake at night – the thought that Netflix might be doing everything right, and a competitor like Amazon could still come out of nowhere and disrupt it.

In fact, he hinted as much in the CNBC interview. Reed Hastings, talking about Amazon, said, “It’s like they are trying to repeal the basic laws of business.” And he also noted, “Everything Amazon does is just so amazing.” Does that mean Amazon is unstoppable?

Going forward, the video streaming market is going to get a lot more competitive – not only do you have companies like Amazon entering the fray, you also have the big cable TV giants, which are rapidly reinventing themselves by embracing video streaming. And, of course, you have all the video streaming upstarts like Hulu and Sling TV.

To be victorious in this hyper-competitive marketplace, you need to have two things: plenty of great content and a very attractive price. For the past five years, just about the only company that could claim both of these was Netflix. It was the giant at the top of the video streaming mountain. But now there’s a new competitor – Amazon – that already has very attracting pricing. With billions of dollars being invested into streaming content, it’s only a matter of time before Amazon narrows the gap with Netflix. And that’s why Netflix CEO Reed Hastings called Amazon “scary” – he knows that the writing is already on the wall. There may be little that he can do to delay or obstruct Amazon, and that’s what keeps him up at night.

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