Is Amazon Repeating Netflix's Mistake?

By Markets Fool.com

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If imitation is the sincerest form of flattery, Amazon.com is payingNetflix another compliment. Amazon began shipping some of its orders earlier this month in ad-supported boxes. The colorful yellow boxes feature characters from the Despicable Me movies, promoting next month's theatrical release of the Minions spin-off film.

The boxes feature an Amazon web address -- amazon.com/minions -- which offers hundreds of Minions-related toys, movies, apparel, and home items for sale. There's also a promotional video showing how the yellow boxes are overtaking an Amazon distribution center.

So, yes, Amazon is starting to utilize its shipping boxes as ad space. The initial reaction seems to be to applaud the move.

No one cares about what an Amazon box looks like. It's merely the outer layer protecting what customers actually want. Who cares if Amazon slaps ads on the boxes? If it helps offset Amazon's razor-thin margins, it's a win-win-win, where customers can continue to get low prices, advertisers can get noticed, and the country's leading e-tailer can collect some ad revenue to improve its fortunes.

However, it bears pointing out that Netflix had a similar idea years ago, but it pulled the plug on the experiment fairly quickly.

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Netflix ads it up before subtracting
Amazon isn't the first dot-com darling shipping physical products to see if advertising can help defray some of the costs of doing business. Netflix went this route 10 summers ago, committing to allowing relevant advertisers to pay for its then-growing audience of DVD renters.

Netflix had tested promotional moves in the months leading up to the announcement. The mailers promoted the live-action Garfield movie, and those same red DVD envelopes turned green in support of Shrek 2,which, surprisingly enough, continues to be the country's highest-grossing animated feature of all time.

However, the floodgates of sponsored missives never truly cracked open. Netflix mailers never turned into a great marketing platform, and it quietly abandoned the plans a few years later. CEO Reed Hastings went on to tell me that the revenue was "pretty inconsequential" -- so it chose to save its mailers for in-house offerings.

Then again, Netflix didn't have as many customers as Amazon does now. Netflix was also shifting to digital delivery, something that Amazon has been doing in terms of media products; but there will always be demand for actual goods.

It should work for Amazon, just as it probably would have worked for Netflix if it wasn't shifting its efforts to its streaming platform that now serves 62.3 million streaming subscribers worldwide -- four times as many accounts as it serviced when its DVD platform peaked.

This isn't the first time that Amazon followed Netflix. It decided to take on Netflix's fast-growing streaming service by offering a growing catalog of TV shows and movies that Amazon Prime customers can check out at no additional cost.

Amazon is right to go the ad route. Competition could be intensifying with Wal-Mart rolling out its Prime knockoff -- ShippingPass -- at half the price later this year. Wal-Mart isn't likely to become a threat out of the gate, but it will keep pricing for Amazon Prime in check.

The ads are coming, and they could be a game changer for Amazon's cost structure.

The article Is Amazon Repeating Netflix's Mistake? originally appeared on Fool.com.

Rick Munarriz owns shares of Netflix. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.