• Amazon Must Offer DVDs-by-Mail As Well As Streaming to Fully Compete With Netflix

    The WSJ is reporting that Amazon is gearing up to offer a subscription service to stream catalog TV shows and movies. Amazon has long offered content on a VOD rental and purchase basis, but a subscription move would put the retail giant into direct competition with Netflix, the current 800-pound gorilla of the TV/movie streaming market.

    However, for Amazon to effectively compete head-on with Netflix it would need to secure comparable streaming rights, which is probably doable, albeit costly. More importantly though, Amazon would also need to offer a full selection of DVDs, delivered by mail, and the infrastructure to support it. In some ways that's a much tougher challenge, and whether Amazon wants to take this on is a huge open question.

    Despite all the progress Netflix has made with streaming, the reality today is that streaming is still the "sizzle" of the Netflix service; the "steak" remains the DVDs delivered by mail. That's due to several reasons: first, DVDs are ubiquitously and affordably viewed on TVs, whereas streaming isn't (yet), second, Netflix has built its brand on DVDs, with streaming a much more recent feature and third, because Netflix's DVD content selection far surpasses what's available for streaming, and will for a long while the hairball of digital rights for catalog TV shows and movies is slowly untangled.

    Massive DVD selection is just part of the competitive edge DVDs give Netflix. It's what's "underneath the hood" that makes the operation so formidable, starting with the 58 distribution centers strategically placed around the U.S. that guarantee quick turnaround of titles (leading to high subscriber satisfaction) and the complex software that manages all of the inventory and logistics. Between the ongoing importance of DVDs and Netflix's delivery infrastructure, the company has built a formidable entry barrier for competitors.

    As long as DVDs retain their value, Amazon would be competing with one hand behind its back if it came to market solely with a streaming service. That's not to say that Amazon's own advantages - it's massive customer base and ability to bundle/promote a streaming service wouldn't be valuable. But if it didn't include DVDs by mail it would have a fraction of Netflix's selection and therefore an inferior offering. This is the same issue that Hulu Plus has, as I outlined last week.

    The good news for Amazon is that if it chose to build up its DVD delivery, it already has a solid foundation with its own distribution centers. No doubt some of the software Amazon uses to manage the delivery of its vast array of products would be beneficial to DVD delivery as well. But significant new investment would still be required. And given that DVDs will eventually be obsolete, it's a dubious business case to make, especially given all the other opportunities Amazon has.

    Add it all up and Amazon has a tall mountain to climb if it really wants to compete head on in subscriptions with Netflix. We'll see whether it has the stomach to do so.

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