Netflix Needs to Take This Challenge Seriously

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Amazon.com (NAS: AMZN) may be gearing up to launch a standalone video-streaming service, a move that would put it in direct competition with Netflix (NAS: NFLX) for the first time. Netflix appears unfazed. Here's what we know, and what it might mean for investors.

Amazonians at the gate
Right now, as part of its Amazon Prime service, customers can stream unlimited video from the company's entire catalog. Non-subscribers can buy or rent individual movies or TV episodes on a per-title basis. This service is called "Instant Video."

The new standalone service would be subscriber-based, but would be distinct from Instant Video, the way Qwikster, Netflix's aborted spin-off from last year, would have been an entity separate from Netflix. Amazon is reportedly set on the idea, and is supposedly just trying to figure out what to charge.

Amazon itself hasn't commented on any of this. This story was first reported in The New York Post, which cited industry sources.

What, me worry?
Netflix is taking the story seriously enough to have already issued a statement to shareholders on the subject: "We expect Amazon to continue to offer their video service as a free extra with Prime domestically, but also to brand their video subscription offering as a standalone service at a price less than ours."

Going further, Netflix blithely discounted the potential competition posed by Amazon and Hulu Plus, saying that "both Amazon and Hulu Plus's content is a fraction of our content, and we believe their respective total viewing hours are each less than 10% of ours."

Yes, you worry
Delivering entertainment, whether by wire or mail, is Netflix's sole source of income. As such, it had better be doing it better than anyone else. Amazon has its one of the largest, most successful retail businesses in the world to fall back on if video streaming doesn't work out or takes a few years to spool up.

Apple (NAS: AAPL) is in a similar position with its fledgling AppleTV, with CEO Tim Cook going so far as to say, "Our Apple TV product is doing quite well ... but in the scheme of things, we still classify Apple TV as a hobby." And let's not forget Google (NAS: GOOG) and its also-fledgling GoogleTV. With their size, reach, and financial firepower, both of these companies, when they decide to put determined effort into it, are going to offer daunting competition to Netflix.

While the company is playing it cool to investors and the press, behind the scenes it had better be sharpening its swords and manning the battlements. The hordes are assembling.

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At the time this article was published Fool contributorJohn Grgurichuses the word "blithe" whenever and as much as possible, but he owns no shares of any of the companies mentioned in this column. The Motley Fool owns shares of Apple, Google, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix, Google, Amazon.com, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has a scintillatingdisclosure policy.

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