Netflix Blunders Leave the Door Open for Amazon Prime

by Josh Vizer
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Trefis
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While Amazon.com (NASDAQ:AMZN) dominates the e-commerce world for books, electronics and other merchandise, there are new entrants to the world of online video. Amazon Prime has been making significant strides in acquiring streaming video subscribers, which could give Netflix (NASDAQ:NFLX) and pay-TV services like Dish (NASDAQ:DISH) a run for their money.

Amazon Prime is a $79 per year service that entitles the subscriber to free two-day shipping on most products. It also now allows the subscriber to view over 10,000 movies or television shows instantly (http://amzn.to/qOyTEa).

See our full analysis | Netflix Earnings Preview: What We’re Watching Monday

As Amazon rolls out Prime, video streaming competitor Netflix has been under significant turmoil. In July, the company raised prices to $7.99 per month ($95.88 per year) for the streaming service and an additional $7.99 per month for the DVD by mail service. It also briefly decided to split its DVD business into a separate service called Qwikster. Netflix projected that 598,000 U.S. subscribers would cancel their service as a result of the changes (http://bit.ly/onvLWz). These lost subscribers could potentially become Amazon Prime subscribers in the future.

Amazon Prime Could Help Lift Operating Margin

Amazon’s current 3% operating margin is a constant challenge for the company. Due to the highly competitive e-commerce industry, lifting this margin in its core business will be difficult. However, the Prime service could produce a huge boost to operating margins. While the company currently does not break out its video streaming business margins, we can examine Netflix for a comparison.

Currently, Netflix’s combined DVD and video streaming service produces a 13.75% operating margin. The DVD business has a lower margin due to the physical storage, sorting and mailing costs. If Amazon were able to produce a high margin for its Prime video streaming service, it would substantially improve the business. Furthermore, Trefis believes that if Amazon fully takes advantage of Netflix’s missteps, it could create a major move up in the stock price.

We have a $240 price estimate for Amazon, which is in line with the current market price.

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