Netflix CEO Reed Hastings says Amazon is Walmart and Netflix is Starbucks -- but that misses a big concern for investors

Netflix CEO Reed Hastings has a new favourite analogy he uses when describing how Netflix and Amazon can coexist in the media landscape: Amazon is Walmart, and Netflix is Starbucks.

Hastings used this analogy twice last week to separate Netflix’s “specialty” function from Amazon’s “breadth.”

“You know, if we try to out-Amazon Amazon, then that’s a losing battle,” Hastings told CNBC. “So what we have to do is be the specialty play. We are trying to be Starbucks and they are trying to be Walmart. So, we have to have brand intense love and focus.”

Hastings brought the idea of focus back again in his second use of the analogy, on stage at the Code Conference. “We’re not trying to meet all needs,” Hastings said. “Amazon’s business strategy is super broad … What we can be is the emotional connection brand … super-focused on one thing that people are very passionate about.”

Netflix will be a beloved video brand, like HBO (only bigger), while Amazon will be, well, Amazon. Amazon is the everything store, and of course Netflix won’t compete with them for that. No one would expect them to. The subtext: investors shouldn’t be worried.

But there’s a problem with that. Investors aren’t worried that Netflix won’t be able to compete with Amazon in selling shoes, or books, or cloud storage. They are worried about something else, something not easily explained with the Starbucks-Walmart analogy.

The flywheel

What concerns some is that Amazon might not actually have to make any money off of premium video for it to be a success. And that could make it a tough player to compete with for companies that do have to make money directly, like Netflix.

Amazon CEO Jeff Bezos laid the case for this at last year’s Code Conference.

“We get to monetise [our subscription video] in a very unusual way,” Bezos said last June. “When we win a Golden Globe, it helps us sell more shoes. And it does that in a very direct way. Because if you look at Prime members, they buy more on Amazon than non-Prime members, and one of the reasons they do that is once they pay their annual fee, they’re looking around to see, ‘How can I get more value out of the program?’ And so they look across more categories — they shop more. A lot of their behaviours change in ways that are very attractive to us as a business. And the customers utilise more of our services.”

This fact could give Amazon a structural advantage over competitors like Netflix. Amazon doesn’t have to sweat the margins, and is set to spend an estimated $US4.5 billion in 2017 competing against Netflix for both customers and content.

“Because we have this unusual way to monetise the premium content, we can charge less for the premium content than we would otherwise have to charge, if we didn’t have the flywheel spinning to help sell more shoes,” Bezos said.

Netflix is broad

While Hastings might want to characterise Netflix as a “specialty” play in relation to Amazon’s entire sprawling company, in the video space, Netflix is actually very broad.

Netflix wants everyone in the world to be a subscriber, and will spend billions and billions of dollars per year to get there ($US6 billion on content in 2017).

Hastings is completely correct that Netflix needs passionate fans that have an emotional connection to its brand, but it’s not as if Netflix is putting out a specialty video service for art-house film buffs, like FilmStruck. Its shows and movies are meant to have broad appeal.

Amazon and Netflix are bidding against each other on shows and movies, and they are competing for your watching time.

There’s enough space

The more compelling argument isn’t that Amazon and Netflix are competing on different fields, but that there will be enough room for both of them.

There’s a lot of evidence that people who subscribe to Amazon Prime are more likely to subscribe to services like Netflix and Hulu as well. It’s not like the streaming-music market, where people are picking either Spotify or Apple Music.

And if you broadly believe that digital distribution with unmake and remake the TV and movie business, then there will likely be a few giants that come out the other side. It’s not a winner-take-all market.

But the competition between Netflix and Amazon is real. They are competing for your eyeballs and for the best showrunners. And in that, they are also competing with the behemoths of traditional TV, who are trying to understand how to adapt their businesses to fit the new digital reality.

If Netflix is Starbucks and Amazon is Walmart, then this Walmart is putting premium coffee shops inside every one of its stores.

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