By Scott Martin, USA TODAY
SAN FRANCISCO -- Neftlix CEO Reed Hastings has a lot going on lately in an effort to rev up the video service. That's what seeing Jeff Bezos' Amazon.com bearing down on you in your rear-view mirror will do.
Amazon.com is steadily boosting the menu of streaming movies and TV shows it offers its Prime subscribers for $79 a year. The online retail giant last month bumped up the number of titles in its video library that can be streamed to more than 25,000, sending shares of Netflix tumbling 6% the day it was announced.
Amazon shows no signs of slowing. "It would be fair to assume that we're going to continue to add to Prime Instant Video," says Anthony Bay, vice president of video at Amazon. "The more great things to watch, the more people will tune in."
The universe of streamed video on the Internet has vastly expanded, with a horde of new contenders entering the fray since the dawn of Netflix's business in 1997. What has become an exciting chapter for home video fans will likely be a pivotal period for Netflix, which does not disclose the number of videos it streams.
"The stakes now are very high, and there are some very big competitors in this ecosystem that will be very hard to fight," Gartner analyst Mike McGuire says of some Netflix rivals.
Netflix is betting on popular TV series titles such as Breaking Bad and Mad Men for loyal viewership. The company also is breaking out of its mold of featuring older movie titles, and has invested in fresh exclusives for Netflix such as House of Cards starring Kevin Spacey, set to air in February, in a bid to attract more subscribers.
For better or worse, Netflix is also increasingly in competition with Showtime and HBO for the hottest video content. That makes Netflix a viable pay-TV window, but at the same time, those rival cable companies are now loath to license to it. Netflix reportedly outbid HBO and plunked down $100 million for the House of Cards series in its thirst for original content.
These steps are necessary -- ponying up for key programs and originals -- to keep customers coming back. That's especially true since Netflix lost access to thousand of video titles from Starz -- plus most Sony movies -- when their contract expired earlier this year. Netflix also likely faces higher future licensing costs for marquee content.
"People have started to understand these things are valuable, and there are a number of players looking at these rights. That's a seller's market. Basically, the prices are going up," says IHS iSuppli analyst Dan Cryan.
Amazon last month measured up to Netflix in a deal with Epix that gives Prime members access to movies that were formerly only available on Netflix.
Bezos and Hastings have been frenemies for years, closely studying each other's businesses. They've met and tried to figure out ways to work together, "but Jeff Bezos is famous for how he cuts very favorable deals for Amazon, and there isn't much left over for partners," says Gina Keating, author of Netflixed: The Epic Battle for America's Eyeballs, which was released this week.
Bezos offered to purchase Netflix for as much as $12 million in 1999 but was turned down by an unimpressed Hastings, says Keating. Instead Hastings kept Bezos out of the DVD rental business by making his service so cheap that Amazon wouldn't bother, she says. The real casualty was the unintended consequence of a Netflix price war with Blockbuster. That drove Blockbuster into bankruptcy and an eventual acquisition by Dish Network.
Netflix and analysts say the streaming service has heaps of customer data that help it offer the right programming and a better user experience. Amazon says it's been in the business of recommending to customers forever.
"We think that we are beating (Amazon.com's Prime) handily at streaming hours," says Ted Sarandos, chief content officer at Netflix. "This is the reconfiguration of television, and there will be competitors."
But Amazon isn't just any competitor. Amazon slowly enters new businesses, undercuts rivals and suffers razor-thin margins to overtake markets, even amid groans from Wall Street for profits. From music to electronics to books, Amazon's online expansion has squeezed the profits of companies such as Borders Group (now out of business), Best Buy and Wal-Mart.
"Amazon.com, that's the biggest competitive risk for all the companies," Citigroup analyst Mark Mahaney says.
What started as Amazon's Prime service - a $79-per-year, unlimited two-day shipping program - has morphed into a video-streaming rival to Netflix's $7.99-a-month streaming service. While Netflix boasts 27 million streaming video customers, Amazon is estimated to have roughly 5 million Prime subscribers. Amazon does not disclose Prime numbers.
Netflix is moving fast with international expansion, securing new licensing terms and zeroing in on regional interests. The gambit - costly in terms of marketing to acquire new subscribers - could cement Netflix's brand in worldwide distribution.
"When they were up against Blockbuster, they planned to be break-even," says Keating. "This is not without precedent. He (Hastings) is just returning to that playbook."
Amazon's video advances are coming at a critical time for Netflix. The video service is recovering from last year's pricing missteps. Netflix attempted in July 2011 to separate its DVD rental business from its streaming business on top of a price increase that drew customer outrage. The move forced the company to warn Wall Street that it lost about 1 million subscribers in that quarter.
Eventually, Hastings reversed course on splitting the business. But by then, Saturday Night Live had lampooned the company's short-sighted maneuver. Shares of Netflix touched $301.50 the day before its very public fiasco, but since have cratered and closed at $65.98 on Thursday.
The crushed share price has renewed speculation that Netflix could be an acquisition target for a pay TV or Internet company, says Macquarie analyst Tim Nollen. "We believe the company could add value to both Facebook or Google," he wrote in a note to clients.
Netflix also faces a fresh round of indirect competition for viewing hours. Last week, Toys R Us jumped into the streaming video fray. The toy retailer launched a rental service that offers more than 4,000 movie and TV titles and plans to expand the service for tablets. Toys R Us also has its own Tabeo tablet in the works.
Mindful of the market for kids consuming media on iPads, Netflix this month unleashed movies and TV programs that target children 12 and under viewing video on the popular tablet.
That comes after Barnes & Noble last month announced plans for its Nook Video service. While not a subscription service, Nook Video will offer movies and TV programs to buy and watch on Nook devices, tablets, smartphones and smart TVs.
Consumers have more options than ever for streaming video over the Internet. Wal-Mart's Vudu, Apple's iTunes, Microsoft's Xbox and Google's Play services are all competing for attention with Netflix - offering rentals and sales. In addition to these entrants, services from Hulu Plus, Redbox Instant, Comcast's Streampix and Dish's Blockbuster@Home all compete for customers of streaming video on demand.
Speculation has persisted for years that Apple is attempting to negotiate with cable providers and Hollywood to offer new forms of streaming video packages. "Microsoft, Google and Apple all have a boatload of cash. These other guys have other businesses and revenue streams," notes Gartner's McGuire. Netflix doesn't. "That is one of Netflix's existential challenges."
All this comes as the Netflix DVD rental business has lost roughly 800,000 members in recent quarters as consumers move toward Internet-based streaming and cloud-based storage of media.
Amazon has another way to attract video customers: The online retail giant is the leading seller of tablets not made by Apple. Those low-priced Kindle Fires provide customers a free month of Prime when the device is activated. Amazon also offers more than 145,000 titles for rental or purchase.
Sarandos counters that Netflix's app is on every platform, including the Kindle. "Netflix has become the killer app for all those tablets," he says. But, "it's the living room experience that really matters to consumers."
Like Netflix, Amazon is moving into original programming with the launch of Amazon Studios. The Amazon group is focused on comedy and children's programs for the moment. Amazon Studios operates under an unusual crowd-sourced business model: Users can submit and review scripts. Those accepted get Amazon's financial backing and production efforts.
The studio has 21 movies in development, says Roy Price, director of Amazon Studios. Price says people can just go to the website and upload a script. Amazon has received more than 2,000 TV pilots and has optioned nine.
"We haven't done original TV in the past, so we can be open-minded," Price says of the types of projects it reviews.
He says the development model is nimble, because they can quickly test ideas and get customer feedback. "It will be an interesting way to organically develop stories with customers."
Also, speculation continues that Amazon could separate the subscription video service from its Prime shipping service. Analysts say that could be a more potent rival to Netflix.
"If and when Amazon launches its streaming video-on-demand as a stand-alone service, it's possible that Amazon will undercut Netflix's already low $7.99 price point," says Nollen. At the same time, Netflix's ability to go to the mat in a price war is limited, given the lack of other revenue-generating businesses at its Internet video service.
Some customers already seem smitten with Amazon Prime. "Still blown away by the value of @Amazon Prime. The shipping alone is worth it ... but the instant video selection is HUGE," wrote Joe Scannell, a student at Marquette University in Milwaukee, on Twitter.
Gartner's McGuire says, "Consumers are in complete control of the content experiences they have."