Netflix Need Not Fear New Amazon Prime Spinoff Service

Jeff Bezos Reed Hastings

True to his bona fides as a visionary CEO, Netflix’s Reed Hastings saw the competition coming a mile away. Maybe too many miles: it was January 2012 when he forecast in an investor’s letter that his arch rival in the streaming game, Amazon, would break off the video portion of its free-shipping program, Prime, as a standalone service.

Hastings probably had a more imminent market entry in mind back then, but it will be interesting to hear what he has to say on Netflix’s earnings call Monday now that his prophecy has finally come to pass. Analysts were quick to issue dire warnings for the implications of Amazon’s move on Netflix, which saw its stock slide about 4% before earnings.

But seductive as the narrative is of an ascendant “Netflix killer,” don’t be so sure.

If Amazon CEO Jeff Bezos had launched a directly competitive streaming service when Hastings was actually expecting it a few years ago, we could have all been treated to a bruising battle for dominance in the subscription VOD space. Truly “killer”-level competition.

But Netflix already has 43.4 million subscribers in the U.S. And even if the company falls short of Hastings’ long-held projection of reaching 60-90 million domestic homes, the shortfall will surely be compensated for by its future growth overseas. Could Bezos’ wildest dreams for Prime’s video-only arm ever come close to matching that kind of scale?

Without making some dramatic move to differentiate its new service from Netflix, Amazon may only have an incremental gain in mind by making this play.

For those who think Amazon has the clout to steal away Netflix subscribers, the logic there isn’t too easy to follow: the $9 price point for the new service simply isn’t compelling enough to siphon away any meaningful portion of the Netflix sub base, and the Amazon library of originals and licensed TV shows and movies isn’t substantially better, either.

It’s more likely that Bezos is betting that Netflix subs are willing to pay for a second or third SVOD option (Hulu) than putting a dent in the competition. Parks Associates recently estimated that 52% of U.S. broadband homes take Netflix–almost double what Amazon Prime has managed, and 14% for Hulu.

That said, the OTT market is getting so saturated with all sorts of niche products beyond the Big 3 that you have to wonder when some market entrants will start retreating because too many services can’t possibly coexist.

Then there’s the bet that as impressive as Netflix’s domestic subscriber base is, there is still considerably more upside to be had when you consider the 100 million pay-TV homes (almost all of whom also pay for broadband) who either don’t mind paying extra for supplemental services or are ready to cut their expensive cords for the likes of Amazon.

But if anyone in the SVOD space is counting on a scenario in which pay-TV sub levels are plummeting, there’s no evidence of that yet. Just 1 million video subs were lost by cable, satellite and telco in 2015, and the fourth quarter showed signs of that trend softening. Cord-cutting is just not happening en masse anytime soon.

Maybe Amazon feels they can accelerate that trend by lowering consumers’ barrier to entry for its subscription video, which until now was purely garnish for Prime. Perhaps Amazon has data indicating that as many tens of millions that are out there enjoying Prime in its $99 incarnation, there is an entirely secondary market with no interest in free shipping for a year, but do want to binge episodes of Amazon Studios originals like “Transparent” and “Bosch.”

The Amazon game plan may have always been about breaking off a separate video service, but the move may have been deemed premature until there was enough tonnage on the originals front to go truly toe to toe with Netflix, which is projected to spend $6 billion globally on content this year.

That Amazon is only flipping the streaming switch stateside tells you how negligible this latest move is to Netflix, which is playing this game on such a broader global basis that even a best-case scenario for Amazon in the U.S. doesn’t mean much.

Where this could become material is if Amazon starts to challenge Netflix in the hundreds of countries where the latter company has a massive head start. Because then Amazon can begin to press an advantage Netflix doesn’t have: the leverage of an ecosystem in which Amazon Video could be upsold to consumers across a range of Amazon retail transactions and devices that only Apple and Google could rival. And if that actually came to pass, Netflix would be acquired by one of them lickety-split.

But that’s a long way into the future. For now, Netflix probably isn’t sweating Amazon’s new video venture.