Netflix vs. Amazon: The Gloves Are Off, Can There Only Be One?

Netflix vs. Amazon: The Gloves Are Off, Can There Only Be One?

Netflix and Amazon are about to lock horns in even more markets as Amazon announced this week that it is expanding its Prime Instant Video service into more than 200 additional markets. Indeed, it seems that the online retailer has long-time video incumbent Netflix in its sights, and it comes as no surprise that the news is making Netflix bears even more bearish.

However, a new survey from one firm suggests that Netflix is strong enough that it could raise its prices yet again and still keep its subscribers. The only question now is what it will take to convince more firms upgrade the company’s stock.

Despite 60% Loss On Shorts, Yarra Square Up 20% In 2020

Yarra Square Investing Greenhaven Road CapitalYarra Square Partners returned 19.5% net in 2020, outperforming its benchmark, the S&P 500, which returned 18.4% throughout the year. According to a copy of the firm's fourth-quarter and full-year letter to investors, which ValueWalk has been able to review, 2020 was a year of two halves for the investment manager. Q1 2021 hedge fund Read More

Netflix bears will be bears

Webush analyst Michael Pachter has been bearish on Netflix for quite some time, and he believes Amazon’s video expansion puts his subscriber estimates for Netflix at risk. Amazon is rolling out its Prime Instant Video as a free service to Prime subscribers in select countries and as a paid standalone service in new regions. The standalone service will be offered with a free seven-day trial in those countries. It starts at $3 or €3 for the first six months and then moves to $6 or €6 per month after that. Netflix’s offering is $10 per month around the globe.

Pachter believes that Amazon’s existing infrastructure around the world enables it to cut the costs associated with its video expansion, which means it can keep prices lower than Netflix can. He also believes that Netflix’s costs will keep rising as it spends more and more on content.

The analyst warns that his international subscriber numbers may be too high, as he believes future streaming subscribers are “up for grabs.” He doesn’t expect current Netflix subscribers to leave for Amazon, but the lower price could convince those who haven’t subscribed to a service yet to try Amazon instead of Netflix.

Content costs in focus for streaming video providers

Pachter likes Amazon’s practice of allowing users to rate shows before approving a full season of them over Netflix’s practice of ordering a full season or more at a time and then posting the entire season at once. He believes this practice reduces the online retailer’s risk and helps it avoid spending on shows that won’t be popular.

The analyst also warns that the two companies are now in a heated battle for content acquisition, which is only going to drive costs up, and he’s not the only one. Cantor Fitzgerald analyst Youssef Squali also highlighted the content battle in his own research note dated Dec. 15. He also notes that YouTube, Hulu and even Facebook are also now entering the arena, which will boost costs even further. As a result, he expects both Netflix and Amazon to increasingly shift toward original content, which bears higher upfront costs but better long-term economics and greater flexibility on rights ownership.

Squali has Overweight ratings on both companies.

Netflix need not fear, says Piper

So does Amazon’s expansion really mean Netflix is in trouble? Piper Jaffray analyst Michael Olson doesn’t think so. He released the results of his firm’s proprietary survey in a research note dated Dec. 15. The survey covered nine countries and broadly pointed to the video streaming provider having some pricing power.

According to Olson, 63% of those surveyed in the U.S., the U.K., Brazil, Spain, Mexico, Germany, Australia, France and Japan said they wouldn’t cancel service if the company raised its prices.

Also 30% said they would accept a 25% increase, and 33% would pay more than 50% higher than the current price or even higher, in some cases. Based on the results of the survey, the Piper Jaffray analyst came up with a $12.40 per month global “weighted average” price for the streaming service. That’s also 35% higher than the average of $9.16 in the fourth quarter.

He’s estimating that Netflix’s worldwide average selling price will increase 23% between the fourth quarter of this year and the fourth quarter of 2020. He believes that the company could minimize churn by offering different tiers, thus maintaining lower-priced options for price-sensitive subscribers. Also increased content could reduce churn, he feels.

Shares of Netflix rose by as much as 2% to $127.43, while Amazon shares declined by as  much as 0.8% to $792.76 during regular trading hours on Thursday.

No posts to display