Today, Morgan Stanley upgraded the rating of Netflix stock, causing prices to rise 10% and close at the highest point in two months. The reason for Morgan Stanley’s upgrade was due to mediocre competition from Amazon Prime, previously thought as one of the biggest threats to Netflix.
Currently, Amazon Prime has around 25000 digital titles versus around 60000 for Netflix. Analysts say that in order for Amazon to match Netflix’s content, they would have to spend over $1 billion on negotiations with various service providers. However, Amazon has not committed to spending that amount to compete with Netflix yet.
This reminds me of a discussion that came up in one of our lectures about efficiency of decisions and the urgency/importance diagram. Competing against Netflix is probably not the most important thing on Amazon’s list, so they would rather spend their money more wisely, for example competing in the tablet market, which Amazon is doing well in, but could be caught off guard by a possible iPad mini. I think Amazon is making the right choice because the market for tablets is much bigger than the market for digital movie rentals. And after all, consumers who purchase an Amazon tablet will likely use the integrated Amazon digital content. That being said, while Amazon does not need to convert Netflix users in the immediate short term, they need to consistently maintain the quality of their service to make sure that their existing customers do not switch to Netflix. Once they succeed in the tablet industry, they will naturally attract more consumers to their digital media business due to the ecosystem in their devices and various other services.