Amazon.com, Inc. (AMZN) and Viacom, Inc. (VIAB) Burn Netflix, Inc. (NFLX)

This a la carte strategy practically admits Netflix can’t afford to pay for the rising cost of content with the amount of content obligations it currently has in the pipeline. More importantly, while the strategy looks like a nice solution on paper, it doesn’t actually work.

First, most media companies prefer to bundle their content. Pay-TV operators can’t avoid it; why would streaming video platforms be able to? Netflix management originally planned to keep its Viacom content costs flat by cherry picking the best content. Viacom didn’t like that idea, and was happy to talk to Amazon about licensing its content exclusively.

Second, when media companies do offer exclusive rights to one-off shows, what’s preventing its deep pocketed competition from outbidding it still? Amazon did this with Downton Abbey earlier this year. It did it with a couple TNT dramas and CBS’s forthcoming Under the Dome too. If Amazon wants something, there’s almost nothing stopping it from outbidding Netflix.

Netflix is betting it can be a better curator than the competition. With its loads of data on viewer habits it just might be. But I’m willing to bet Amazon, with its data on consumer habits, can do a pretty good job too.

The bottom line

The Viacom deal is a big win for Amazon, and a minor blow for Netflix. Viacom locks up some growth in its streaming fee revenue stream, but will need to grow its other revenue streams going forward, which it’s struggled to do.

More interesting, however, is what the deal between Amazon and Viacom says about Netflix’s new content acquisition strategy. I’m very skeptical it can work, and believe the deal shows the weakness inherent within the strategy. Amazon’s content library might not match Netflix’s quantity or quality currently, but I think it’s fast approaching a level of parity. When Amazon starts promoting its Instant Video service to outsiders, Netflix might have a harder time holding onto its huge subscriber base.

Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Adam is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Amazon and Viacom Burn Netflix originally appeared on Fool.com is written by Adam Levy.

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