Thursday, April 24, 2014

AMZN, NFLX: Amazon/HBO deal is a big deal!

As we basically stated on 4/2, Amazon's Fire TV service may not be good news for Netflix (NFLX).  Well, NFLX got the first taste of that on Wednesday (4/23), as AMZN announced a huge deal (huge, in our opinion) with Time Warner's (TWX) HBO.  Maybe NFLX management saw this coming as it spoke too kindly of one of its 'partners', AMZN, while it announced plans to increase subscription prices during its Q1 conference call, or 'interview'.  

Although the agreement with HBO includes only HBO's old shows, AMZN still gets that initial and first ever "online-only" access to HBO's very valuable content library.  In addition, this is an exclusive and multi-year deal.  AMZN has now taken the first step to compete very effectively with NFLX.  

We note that according to the Company's press release, AMZN will get the older episodes of more recent shows about 3 years after they are shown on HBO.  And Games of Thrones, the latest HBO hit, is not included in the deal.  

With all of this, the deal may not sound very significant, but we think it is, as it will increase Fire TV subscribers which will likely attract more content creators to sign additional deals, possibly exclusive ones, with AMZN.  This will also force NFLX to pay more for content and/or spend more on co-producing original content.  This deal also eliminates the pursuit of 'long tail' content as an option for NFLX.  As we discussed after NFLX's Q1 release, this is why NFLX plans to increase its prices; it is being forced to do so.  And higher prices are not usually welcomed by consumers over the long-term.   

We are assuming AMZN is paying a hefty price for this deal.  As we said earlier this month, we think AMZN is willing to throw money at 'premium' content; it is capable of doing so.  

Lastly, we are assuming that cable companies and telcos are now glad they added Internet service to their offerings and became ISPs a while back, as the more content is being streamed by OTTs, the more bandwidth is necessary, and the more likely it is that OTTs will pay a premium to maintain or increase, as NFLX management says, "member satisfaction" (e.g., the NFLX/Comcast agreement).

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