Is Amazon About to Repeat Netflix's Big Mistake?

Amazon.com (AMZN) may be gearing up to start charging for its unlimited video streaming service.

If what industry sources are telling the New York Post holds up, the leading online retailer would go from giving away streams of select movie and TV show titles to its millions of Amazon Prime subscribers to selling the unlimited service as a stand-alone offering.

If this all sounds somewhat familiar, just rewind a few months to a summer that Netflix (NFLX) would prefer to forget.

Tollbooths are Painful

Since the inception of its streaming service in 2007, Netflix included access to its growing library of streaming titles for subscribers of its unlimited DVD plans.

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Pressured by studios that believed their output was being devalued as a service freebie, Netflix decided to charge for its streaming platform. It began offering streaming as its own disc-less service in both Canada and the United States for $7.99 a month.

Netflix then turned up the intensity this past summer, announcing that it was splitting its plans into two. All customers wanting access to the company's digital vault would have to pay $7.99 a month. It lowered the prices of its disc-based plans by $2 a month to help offset some of the sting.

Well, we know how that played out. Netflix lost a net 800,000 domestic subscribers during the third quarter -- only to make back some of that ground during the fourth quarter. The stock cratered. Subscribers grew resentful.

Why would anyone pay for what they got before at no additional cost? Perhaps video buffs didn't realize all of the money that Netflix was throwing at its streaming service in the form of costly licensing deals. Perhaps they didn't realize that it was the studios -- more than Netflix -- that wanted a price associated with the Web-served video.

Studios want respect

Amazon Prime members pay $79 a year for free two-day shipping and deeply subsidized overnight deliveries on Amazon-warehoused goods. This has been a popular loyalty shopping platform for Amazon; analysts believe that there are 7 million to 8 million Prime members.

However, as Amazon's flagship media items migrate to digital delivery, the incentive to pay up for a free shipping service becomes less compelling. Amazon has helped offset that resistance by giving Amazon Prime members some extra online benefits.

Prime members, for example, can rent one of several select Kindle e-books for free each month. Video streaming on roughly 13,000 titles is another perk, though Amazon has never revealed how many of its customers are taking it up on its offer.

The library available to Prime is woefully inferior to Netflix's at this point, and understandably so. Netflix has been inking deals since 2007, and has a wide enough subscriber base that it can outbid the competition. However, rolling out a stand-alone premium service -- something that even Netflix, during Wednesday night's conference call, conceded will likely happen -- will find Amazon in the hot seat that at least temporarily crushed Netflix's killer brand.

Will the content be that much better? Will Amazon be able to compete against Netflix? The only way that Amazon can do this right would be to continue offering the streams to Prime members at no additional cost, while introducing an even cheaper annual plan for those who just want to stream video.

We'll see how this plays out, but we've already seen how it went for Netflix.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article, except for Netflix. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Netflix and Amazon.com.