Some Question Whether Netflix Can Compete With Amazon Prime's Low Price

Wall Street expects Netflix, Inc. NFLX to be under pricing pressure following Amazon.com, Inc. AMZN’s announcement that its Prime Video is now available in 200-plus countries at the aggressive launch price of $2.99 per month for the first six months, and $5.99 thereafter.

Amazon achieved this feat after Netflix completed its global launch to about 200 countries in January 2016. For Prime subscribers in Belgium, Canada, France, India, Italy, and Spain, Prime Video comes at no extra cost.

Apart from driving demand for global and local rights, Cantor Fitzgerald analyst Youssef Squali says Amazon's latest move could prompt Netflix to offer tiered pricing in select markets sooner rather than later, especially in countries with a lower per- capita income.

Furthermore, BMO Capital says the $5.99 is a discount of about 20 percent to Netflix's international ARPU of about $7.50, and compares to the 10 percent discount of Prime Video standalone ($8.99) versus Netflix's most popular product in the U.S.

“We believe the combination of attractive pricing and a growing list of Amazon originals can drive strong international Prime Video signups,” says analyst Daniel Salmon.

Importantly, in countries like India, Amazon’s brand is more familiar than Netflix, which could help drive subscriptions. Salmon believes India presents a large opportunity for Amazon, and the inclusion of Video in Prime memberships gives it an extra edge over local rivals Flipkart and Snapdeal.

Positively, these markets don't represent significant revenue for Netflix — meaning that potential pressure on ARPU is not likely to be felt for a while.

In addition, Amazon’s strong balance sheet and cash position should enable it to spend more on originals, as well as content purchases over time. Squali estimates Amazon’s $3-4 billion of content spending is lower than Netflix’s $6-7 billion for 2017.

But, Amazon expects to double digital content spend year-over-year in H2 2016, and Salmon anticipates a major share of the spending spend should go toward non-English programming to support the global rollout. Further, Amazon should top low cost with aggressive marketing to extend the reach of the service.

Amazon’s latest expansion of Prime Video is considered a negative for Netflix, as Amazon has taken direct aim and is utilizing tactics similar to those that led to Netflix’s rise as the dominant player in streaming.

Nevertheless, the Street remains positive on both companies, as they are the biggest beneficiaries of the positive secular trends within content streaming and OTT, or over-the-top content. Research and Markets says Amazon Video will have 51 million subscribers in North America by 2021, and generate revenues of $2.486 billion.

Comparatively, Netflix is forecast to have 59 million paying SVOD, or subscription video on demand, subscribers in North America by 2021, up from 53 million at the end of 2016. The research firm predicts Netflix's North American SVOD revenues will increase from $5.358 billion in 2016 to $6.853 billion in 2021.

Salmon has an Outperform rating on Amazon shares, while Squali is Overweight on both Amazon and Netflix.