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Reading The Netflix Tea Leaves

By Paul Sweeting

Peter Kafka at AllThingsD had an interesting read on Netflix’s third-quarter results released yesterday. According to Kafka’s interpretation of what Netflix CEO Reed Hastings said in his letter to shareholders on the results – without quite spelling it out — is that Amazon is developing into a serious competitor for Netflix.

Here’s Kafka’s take:

The company used to have the Web home video market more or less to itself, and now it doesn’t. It’s facing competition from Amazon, Hulu and the cable companies, and is about to start fighting a joint venture between Redbox and Verizon.

That’s not a new observation, of course. But in this quarter’s letter to shareholders, Hastings spells out the strengths and weaknesses of many of his competitors, and it makes for very interesting reading [snip].

The breakdown: Jeff Bezos and company have been building up a digital streaming service that they’ve been bundling with their Prime service for a couple years now. And for a couple years, Netflix — as well as the studios that sell Amazon their programming — has said that consumers don’t seem to be using Amazon’s service very much.

If I’m interpreting Hastings’ comments correctly, that’s changing. Here’s what Hastings said about Amazon last quarter, which echoes comments he has made for several quarters: “We have yet to see Hulu Plus or Amazon Prime gain meaningful traction relative to our viewing hours.”

But here’s Hastings today: “Our estimate is that viewing of Amazon Prime Instant Video has yet to pass that of Hulu.” Perhaps I’m misreading Hastings’ comments here, but he chooses his words pretty carefully (and I’m told he does write these things himself). And to me, there’s a real difference there — one that reads as if Bezos is coming up in Hasting’s rear-view mirror.

I think Kafka is reading it correctly. As I’ve noted here before, Amazon’s streaming service is part of a broader, device-based Kindle Fire ecosystem that gives it leverage Netflix just doesn’t have as a standalone service. Amazon is also able to offer its users content in multiple windows, under multiple business models, and at different price points, making it more of a one-stop shop, even if it doesn’t have the breadth of content in its library yet that Netflix has.

Netflix’s broad distribution and its one-price, one-size-fits all offer make it a very simple service for consumers to understand and use, which many users clearly appreciate. But if I had to guess which of its competitors would be gaining on Netflix, I would guess Amazon because of the leverage provided by Amazon’s device strategy.

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