April 19, 2016 Last Updated 11:02 am

The new formula: Own the device platform, own the distribution platform, rent the content

Netflix stock gets hit hard by twin setbacks: disappointing customer growth and earnings, and the news that Amazon will be letting customers subscribe to its movie streaming as a stand-alone product

The online retailer Amazon on Sunday announced that customers will be able to subscribe to its Prime movie streaming service for $8.99 per month, its Prime service including two day shipping for $10.99 per month. Tech observers immediately saw the new service as a direct swipe at Netflix. As a result, Netflix stock nosedived in after hours trading on Monday.

But the picture is a little more complex than that. Netflix also reported its quarterly earnings on Monday and the numbers came in below company forecasts. Yes, the company reported a record number of new customers, but that was because the company had expanded its service internationally, and the number of new customers it brought in was below forecasts. Additionally, the cost of the expansion cut into earnings.

Netflix-i-mo-chartNetflix is raising the price of its service to those longtime customers in the coming months, something the company had previously announced. But it is clear that Netflix is concerned that, despite the rather modest increase in price, that it might lose customers, so it is taking a go-slow approach.

“To reinforce brand trust, we won’t change anyone’s price without their acknowledgement of the new price in their member experience, where they will see a dialogue box about their options,” Reed Hastings, chief executive of Netflix, said in a shareholder letter. “Members can choose our $7.99 SD 1­screen plan, our $9.99 HD 2­screen plan or our $11.99 UHD 4­screen plan. We are rolling this out slowly over the year, rather than mostly in May, so we can learn as we go. Most of our grandfathered members are in the US, but we’ll take the same approach internationally.”

What may be troubling Netflix is not the new competition from a reconfigured Amazon streaming service, but that the new service probably says a lot about how Amazon is doing with its platform.

amazonfiretv-340What Amazon and Apple have is a situation where they own the device, as well as the streaming service. They are not alone, as Google, Microsoft (through Xbox) and Roku are doing similar things. But Apple and Amazon are leading the others and are in the best position to dominate. Amazon is also going strong into original programming, right now Netflix’s area of strength.

This is a feature of the new publishing and distribution reality: companies that own the devices and the distribution channels, while dipping their toes into content. Imagine twenty years ago if RR Donnelley had bought any of the large wholesale distributors and then said they would only sell those magazines inside its own retail outlets. Publishers would have been astounded and certainly up in arms.

The digital landscape is certainly more competitive that print in this regards, but publishers have much more power and influence over their vendor partners in print than they do in digital (though I know it doesn’t always feel that way).

As for Netflix, they are platform neutral, available for use on Apple’s platform, Roku’s, etc. But this may not always be the case. I can certainly see a time when one of the tech giants say that they no longer feel Netflix fits into their system. Amazon, after all, stopped selling the Apple TV, just because. One might understand this because they are direct competitors in regards to their devices. But they are also direct competitors in regard to Prime versus iTunes.

Would it benefit Netflix to sell out? Hard to say, and I don’t see this happening anytime soon. But today Netflix stock is down another 10 percent today, and I would assume more than a few shareholders and starting to entertain the thought.

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