DirecTV boasts 20.11 million U.S. subscribers, earning an average of $96 a month from each one. DirecTV (NASDAQ:DTV)’s On Demand service is bundled with a satellite subscription to dozens of tv channels, something Netflix can’t offer. For viewers who want both TV channels and on-demand entertainment, DirecTV (NASDAQ:DTV) beats Netflix every time.
Amazon.com, Inc. (NASDAQ:AMZN) bundles its media programming with membership in Amazon.com, Inc. (NASDAQ:AMZN) Prime. An estimated 10 million members pay Amazon Prime subscriptions and individually spend, on average, more than twice as much as a non-Prime member over the course of a year. Morningstar analyst R.J. Hottovy added up the additional revenue generated by Prime shoppers, subtracted the cost of all the Prime subscription perks, and determined that each Prime customer made Amazon about $78 in 2012. Collecting $78 from each Prime member means $780 million in Amazon profits.
To put that in perspective, Amazon reported net income of $631 million for all of 2011 and -$39 million in 2012. Without the Prime subscriptions, Amazon would have been in the red (or even more so) for two consecutive years. No wonder Amazon tries to entertain Prime customers with Amazon Video. If an online shopper decides to buy Amazon Prime for the free two-day shipping perk, he could find that he doesn’t need a Netflix subscription.
The Netflix advantage
Without the fancy product bundles of Time Warner, DirecTV, and Amazon, Netflix, Inc. (NASDAQ:NFLX) must own the best content to survive. But the bright side is that’s Netflix’s advantage. Time Warner’s focus is TV networks and entertainment. DirecTV provides cable. Amazon owns online shopping. Netflix must be digital syndication, and it must be the very best at it.
All media companies are in a fight for customers. Paying premium prices for exclusive content diverts competitor funds away from providing core services to customers. So in the long run it’s quite possible that on-demand entertainment will drain rivals’ resources. But exclusive content is Netflix’s focus, and this is where Netflix will win the battle. I believe acquiring expensive content is the right strategy. If Netflix holds exclusive rights to a viewer’s favorite shows, Netflix wins the customer.
Farewell to the old system of syndication, because I think the Netflix model is here to stay.
The article 1 Company Transforming the Media Industry originally appeared on Fool.com and is written by Marie Palumbo.
This article was written by Nathan Adamo and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any of the stocks mentioned. The Motley Fool recommends Amazon.com, DirecTV, and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Marie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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