Breakout

Aggressive Development: Amazon Takes on Netflix

Jeff Macke
Breakout

Earlier this week Amazon (AMZN) announced that it will be producing five new series to be released exclusively on the company's Amazon Prime Instant Video service later this year. The five shows were chosen from a pool of 14 pilots — made available to subscribers in April — based on viewer feedback. Amazon's move comes just five days after Netflix (NFLX) released 15 original episodes of cult sitcom favorite "Arrested Development."

The move into creation of original content marks a turning point in the streaming wars. A growing number of studios are jacking up licensing rights for content or simply creating their own online rental services. Last year Netflix lost more than 1,000 films from its library after failing to negotiate a deal with Starz. Earlier this month Netflix's deal with Viacom (VIA) expired, which caused Netflix to lose the rights to toddler titles like "Dora the Explorer" and "Sponge Bob Square Pants."

In total, Netflix has lost the rights to more than 3,000 shows and movies in the last year. In theory, it makes sense for Amazon and Netflix to build their own content. In practice, the economics are questionable. According to optionMONSTER's Jon Najarian, there is a possible financial pay-off for the companies when these ventures are unknowable.

"I think what they're trying to do here is confuse the investor," Najarian says in the attached video. "When you're carrying a multiple that these guys both carry you don't really need to be directly compared to Disney (DIS) or Time Warner (TWX)."

There's a good reason there are so few free-standing publicly traded content production companies — it's literally a hit or miss industry. Netflix spent a reported $100 million producing the Kevin Spacey vehicle "House of Cards." A year of monthly subscriptions creates $72 of revenue. Losing Sponge Bob and replacing it with a dark political psychodrama will not result in 1.4 million new subscribers for Netflix.

The bottom line has nothing to do with either company's actual bottom line on an income statement. The content wars are about establishing a large enough lead in streaming to get companies like Time Warner's HBO to give up on their own initiatives.

Asked to handicap the Amazon versus Netflix kerfuffle, Najarian is putting his money on Jeff Bezos. "I'd rather own Amazon, but I don't want to bet against Netflix for a whole bunch of reasons." To hear those reasons you're just going to have to watch the video at the top of the page.

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