Could Amazon's Rumored HBO Deal Hurt Netflix?

By Markets Fool.com

Amazon (NASDAQ: AMZN) could soon partner with Time Warner (NYSE: TWX) to add HBO Now to its Amazon Channels in a three-year deal, according toThe Information. Could that give Amazon a strategic advantage against Netflix (NASDAQ: NFLX) in the streaming video market? Let's take a closer look at this deal to decide.

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HBO's Westworld. Image source: HBO.

What are Amazon Channels?

Amazon Channels are apps which let Prime members subscribe to individual channels for additional monthly fees. There are about 75 apps on the platform, which serves as a "virtual cable service" in which users can simply pay for the channels they want.

On the surface, it's similar to the app-based channels on AppleTV, Roku, and Alphabet's Android TV. However, Amazon Prime members pay less for those subscriptions compared to the stand-alone apps. For example, a stand-alone subscription toCBS'Showtime usually costs $11 per month, but only costs $9 per month on Amazon Channels.

Therefore, the more channels a Prime member signs up for, the more money they save. That's a fairly efficient way to tether more premium streaming channels to its Prime ecosystem, which already offers free streaming TV shows and movies via Amazon Video.

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How HBO Now would help Amazon

HBO Now is already available on awide variety of devices, including Apple TV, Roku, Chromecast, Android TV, Samsung smart TVs, and various mobile devices. However, a big complaint about HBO Now is its $15 per month price tag, whichseems high compared to Netflix's $10 (HD) and $12 (4K) plans.

Amazon offers Prime memberships for $99 per year, $11 per month, or $9 for Prime Video. If Amazon Channels offers HBO Now at a lower rate (perhaps $10-$12 to compete against Netflix), many non-subscribers could add HBO Now to their Prime subscriptions. Back in July, CIRP reported that Amazon had63 million Prime members in the U.S. -- an increase of 19 million from a year earlier and enough to outnumber non-Prime members. By comparison, Netflix finished last quarter withabout 46 million paid members.

Image source: Amazon.

That growth gives Amazon tremendous clout in negotiations with streaming content providers, who are likely willing to give Amazon users a discount in exchange for a ride on the Prime bandwagon.

How this deal could hurt Netflix

Netflix is available on Amazon's Fire TV platform, but it isn't discounted on Amazon Channels. Since Amazon Video is Netflix's fastest growing competitor, it'shighly unlikely that Netflix wants to tether itself to Amazon's ecosystem and lower its prices for Prime members. But the bigger Amazon Prime grows as a "one stop shop" for e-commerce purchases, video, music, e-books, and other perks, the more attractive Amazon Channels might look as an alternative to traditional cable bundles.

If Amazon signs a partnership with HBO, it could also lead to a closer relationship with AT&T (NYSE: T), which recently agreed to buy Time Warner. Amazon, Netflix, and other streaming players currently pay AT&T and other internet service providers "paid peering" fees for faster Internet connections. AT&T also "zero rates" DirecTV videos on its own wireline and wireless networks -- meaning that viewing those videos won't deplete data plans. However, companies like Netflix must pay AT&T to zero-rate their streaming video apps.

If Amazon and AT&T expand their relationship, AT&T may offer lower paid peering rates to Amazon, or even zero-rate Amazon Channels on its networks. Doing so would immediately raise red flags with regulators, but the Trump Administration's soft stance onnet neutrality might let such deals pass. If that happens, Netflix might need to raise its rates again, making it pricier than an Amazon Channels/HBO Now combination.

Let's not get ahead of ourselves yet...

Getting a discount on HBO Now for Amazon Channels would be a clever move by Amazon, but there's no guarantee that a deal will be signed. If a deal is signed without a Prime discount, it would be redundant because the HBO Now app has been available on Fire TV since its launch last year.

While Amazon Channels extends Amazon's Prime video ecosystem with additional subscriptions, it doesn't directly impact the battle between Amazon Video and Netflix. Netflix investors should keep an eye on a potential deal, but they shouldn't assume that it will let HBO Now hitch a ride on Amazon Prime to become a heavyweight contender in the crowded streaming market.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon.com and AT and T. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Apple, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Time Warner. 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.