Will Amazon's Latest Move Benefit Netflix?

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One of the biggest questions concerning the price of streaming video is, "How much is too much?" When Netflix (NASDAQ: NFLX) announced in October that it would be raising the price of its most popular plans, many wondered whether it would result in increased cancellations for the service.

In the second quarter of 2016, Netflix only added 1.7 million net new members, missing its own forecast of 2.5 million. During that quarter, Netflix ended the lower "grandfathered in" prices for longtime customers. The company blamed the increased subscriber defections on negative press coverage related to the price changes. That was the second time that Netflix endured customer cancellations after an announced price increase.

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Now, all eyes are turning to its biggest rival in the space, Amazon.com (NASDAQ: AMZN), as the online sales giant announced a significant increase to the price its monthly Prime membership plan -- which includes streaming video.

The devil's in the details

It's important to point out that this isn't strictly an apples-to-apples comparison. Amazon Prime members get free shipping, streaming music, and a host of other benefits, along with streaming video. Prime has long been a staple among regular customers willing to fork over $99 per year for the privilege of free two-day (or sooner) shipping of many products purchased on Amazon's e-commerce site.

In April 2016, Amazon introduced two monthly payment options for those unable or unwilling to pay the full $99 at once (which works out to a monthly cost of $8.25). Shoppers could opt for an $8.99 version that only gave them access to the Prime Video streaming service, or a $10.99 plan that included all the perks of Prime, including expedited shipping.

Last week, Amazon announced a change to its Prime subscription, increasing the monthly cost from $10.99 per month to $12.99 per month -- an increase of 18%, while also increasing the cost of Prime Students from $5.49 to $6.49. Prices for the annual plan and the monthly streaming-video-only plan remain the same. The flexibility gained by those choosing the monthly plan is expensive -- 57% more than the cost of the yearly subscription.

But at what cost?

It's highly unlikely that any of Amazon's Prime members will give up the service for Netflix. Amazon was careful not to increase the cost of its streaming-video-only option from its current level of $8.99, which is already $1 higher than the basic Netflix plan at $7.99. Not only that, but people previously paid the annual fee for Prime just to get the free two-day shipping -- myself included.

This strategy is not without risk, however. Prime members spend considerably more than non-Prime customers. While the average Amazon customer spends $700 annually on purchases, Prime members spend $1,300, on average, according to Consumer Intelligence Research Partners (CIRP). Amazon has a vested interest in increasing the roles of those higher-spending Prime customers. A price increase risks alienating the very customers the company is trying to court.

Many believe that the monthly payment option was an effort by Amazon to increase the ranks of its lower-income shoppers. Those households earning less than $50,000 per year are the fastest-growing demographic among Prime shoppers, according to analysts at R.W. Baird. Increasing the per-month cost for this price-sensitive group may backfire, resulting in cancellations and fewer new subscribers.

Amazon likely has an ulterior motive. The company may believe it will increase its monthly subscription revenue, while nudging those subscribers toward the less expensive annual Prime membership. Whether or not that will work remains to be seen.

The bottom line

This isn't a zero-sum game. Nearly 38% of streaming-video customers subscribe to more than one service, according to Decoding the Default, a report by market-research firm Hub Entertainment Research. Even more telling is that 14% of steaming-video viewers subscribe to services by all three of the largest providers: Netflix, Amazon, and Hulu. The fact that consumers are willing to subscribe to more than one service shows that there will be multiple winners in the space.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon and Netflix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.

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