Amazon opens Prime Video to monthly memberships in a challenge to Netflix

April 19, 2016 12:30 AM PT

For several years, Amazon has been burnishing its Hollywood credentials with such acclaimed shows as “Transparent” and “Mozart in the Jungle” in an effort to unseat Netflix as the king of television streaming.

Now the e-commerce giant is taking another bold step to challenge Netflix.

The Seattle company on Sunday spun off Prime Video — a perk to its annual Prime membership — as a stand-alone monthly service. Amazon has long offered an annual Prime Membership for $99, which includes free two-day shipping and full access to music, movies and TV offerings.

Under the new plan, customers will have access to the video service for $8.99 a month (or $10.99 a month for all the Prime services).

The move not only benefits customers seeking the greater flexibility a month-to-month plan affords. It also positions Amazon more aggressively in the increasingly crowded video streaming market. Amazon has been working hard to bolster its image as a destination for quality entertainment, not just a place for online shopping.

Investors warmed to the news. Amazon shares closed Monday at $635.35, up $9.46, or 1.5%,

Wall Street was not so kind to Netflix, however. The Los Gatos, Calif., company’s shares plummeted as much as 12% in after-hours trading after Netflix predicted it would add fewer international subscribers in the second quarter than expected.

Amazon’s new venture further raises the competitive stakes for Netflix.

“We view this move by Amazon as a significant negative development for Netflix,” said RBC Capital Markets analyst Mark Mahaney. “Amazon certainly has the brand name, the customer relationships, and the focus on high-quality consumer experiences to impact the growth in Netflix’s U.S. subscriber base, and perhaps eventually its global subscriber base.”

Other analysts cautioned, however, that Amazon faces a tough task given Netflix’s deeper ties with the entertainment industry.

“Netflix has a better brand as a video subscription service,” said Michael Pachter, a media industry analyst with Wedbush Securities. “Amazon’s brand is retail. If you ask 100 Prime members why they subscribe, they’ll say for free shipping. Ask 100 Netflix subscribers why they are members, they’ll say it’s for the content. It’s going to be hard for Amazon to establish itself as a video competitor.... This won’t be automatic.”

Amazon has long been seen as a runner-up to Netflix, which has more than 81 million subscribers worldwide. Recently, however, Amazon has turned heads with a number of high-profile film and TV deals. At the Sundance Film Festival in January, Amazon emerged as an aggressive buyer of independent films. Its Woody Allen film, “Cafe Society,” will open the Cannes Film Festival next month.

Amazon’s video service features such notable programs as PBS’ “Downton Abbey,” children’s shows from the Nickelodeon TV network, and past seasons of HBO series such as “The Sopranos.” Amazon also offers movies from the premium TV network Epix.

In an earnings call with investors, Netflix Chief Executive Reed Hastings didn’t directly address Amazon’s venture but acknowledged the rising competition in the video streaming space.

“Hulu is doing some great work,” Hastings said. “Amazon is, HBO, Showtime — there are so many competitors. Everyone is working hard to build the best content. We’re seeing growth in the overall Internet TV market.…This is all part of the natural evolution from linear TV to Internet TV.”

Meanwhile, Netflix posted first-quarter revenue of $1.96 billion, slightly below the $1.97 billion that analysts expected. Net income rose 17% to $28 million, or 6 cents a share, well above the 3 cents that analysts had forecasted.

The streaming giant added 2.23 million subscribers in the U.S., also well above the 1.82 million that Wall Street had projected, buoyed by the popularity of such shows as “Fuller House” and the documentary series “Making a Murderer.”

Nonetheless, the growth was below the 2.28 million subscribers that Netflix added a year earlier.

Netflix will begin charging $9.99 for its standard membership in May (an increase of $1 to $2, depending on a customer’s date of enrollment).

Aside from competing with Netflix, Amazon has other motivations behind its video service, analysts say.

The online retailer ultimately wants more users to sign up for Prime. Prime Video’s $8.99 monthly plan may encourage new subscribers to eventually pay the extra two dollars to get the benefits of free two-day shipping and other Prime features.

“It’s their goal to upsell people for Prime,” Pachter said. “It’s a compelling offering if you shop enough.”

Membership for Amazon Prime grew 35% last year to 54 million, according to Consumer Intelligence Research Partners. Prime members spend, on average, $1,100 a year on Amazon compared with $600 for non-members.

Both of the new monthly Prime membership options are more expensive than an annual membership. The monthly Prime membership, when added up for a year, totals $131.88; the Prime video option totals $107.88.

An incentive to sign up, however, is that the new monthly memberships can be canceled at any time.

Surveys by consulting firm Parks Associates found that many people who signed up for Prime Video’s free 30-day trial were not converting to subscribers.

About 34% of people surveyed by Parks Associates said they canceled their Prime Video service because their free trial expired. By comparison, about 19% of respondents said they canceled Hulu and Netflix subscriptions because their free trial expired.

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