Amazon.com, Inc. (AMZN) has had an ugly year, with the stock down about 16% year-to-date vs. a gain of about 12% for the S&P 500.
There are a host of reasons for this — including multiple missteps with hardware endeavors including the ill-advised 3-D Fire Phone and the Fire TV set-top box, as well as a general lack of profitability that has characterized AMZN stock for a few years now.
I personally am quite bearish on Amazon stock for a number of reasons, including its lack of profits and big spending on waste-of-time hardware efforts as of late.
But one of the biggest reasons to be skeptical of AMZN as of late isn’t hardware or e-commerce challenges … it’s the company’s streaming video arm, which increasingly looks like an exercise in futility.
Netflix Is Killing Amazon Prime Video
A recent analysis from Sandvine offers a unique look at the streaming video landscape, and shows just how much of the marketplace is controlled by Netflix, Inc. (NFLX) and just how far Amazon has to go with its Instant Video services.
According to the Sandvine report, Amazon Prime Instant Video saw its share of Internet traffic double from 1.27% in March 2013 to 2.58% as of September 2014.
That’s admittedly impressive growth … however, it’s a long way from Netflix, which commands more than one-third of Internet bandwidth during peak hours.
Now there’s no real way of extrapolating hard profits and growth out of this. Amazon is notoriously closed-mouth about its Prime subscribers, and estimates range anywhere from 30 million to 50 million customers. Similarly, while we know that Netflix has 37.2 million domestic streaming customers, there’s not much visibility into what they watch, how much they watch and what individual content costs are for NFLX.
Still, the fact that Netflix remains so far ahead of Amazon by share of Internet traffic according to Sandvine is a very real problem. Even if there are as many Prime members as Netflix users, they certainly aren’t nearly as interested in the video perks that come with their subscription.
Prime Subscribers Don’t Want – or Need – Video
This mirrors the sentiment captured in a recent research note entitled, “Amazon: Is Prime Instant Video a Total Waste of Money?” In the report, Bernstein Research point to costs of Amazon Prime Instant Video “depressing margins and hiding the profitability of its core business.”
Specifically, a survey of 1,000 consumers shows that a mere 13% consider video the most important reason for subscribing to Amazon Prime.
Remember, the AMZN subscription service gets its roots in expedited shipping and other perks for “power shoppers” on Amazon.com. That’s the core business here, and Prime does a great job supporting it.
But if the users don’t want or need video, and Amazon is shouldering big costs to buy content and sucking up a lot of R&D efforts with launches like the Fire TV Stick that are meant to support the video arm of Amazon … what the heck is the point?
Given that investors are unenthusiastic about AMZN stock right now given its lack of profits, it might be a good idea for Amazon and its CEO Jeff Bezos to forget about wasting time on video as a perk for Prime members and focus on the core e-commerce business and boosting margins.
It’s great in theory to consider that Amazon Prime Instant Video could open up a brand-new revenue stream long-term and give AMZN stock a big competitive advantage over other e-commerce sites and other retail memberships like those at Costco Wholesale Corporation (COST) or Wal-Mart Stores, Inc. (WMT) warehouse arm Sam’s Club.
But the practical reality is that AMZN stock holders have a right to demand Amazon.com start thinking about profits now and be realistic about the fact it may never compete with Netflix on streaming video.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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