Is Amazon's Prime Video A Threat To Netflix Dominance?

Netflix has been the undisputed streaming video champion in the United States, but Amazon's Prime Instant Video appears ready to step up as the top contender for the title.

Though it stands well behind the industry leader, Amazon's video service, which was once little more than a throwaway add-on for its $99 per year free shipping offer, has become a clear number two, according to Nielsen's Total Audience Report for the fourth quarter of 2014.

Source: Nielsen

As you can see above, Netflix has near total penetration of the U.S homes which have access to subscription-based video on demand services. Of the 40.3% of households with SVOD access, the streaming giant has 36% using its service.

Amazon is second, but it's a strong second -- and data suggests it's gaining. Just a year ago, Amazon announced that it had moved into second place, passing Hulu. At the time, Qwilt, a video technology company, reported that Prime Instant Video "had just 3%" market share, which was up from .6% percent one year prior to that,GeekWirereported.

Prime Instant Video is gaining, but it might be Hulu -- and all the other streaming services which are fighting to get into the mix -- that should be worried, not Netflix.

There can be more than one winnerAmazon's gains are not necessarily bad news for Netflix. The Nielsen data shows that 13% of American households subscribe to more than one SVOD service, and there is no reason to believe that number won't increase. The report showed that connected homes actually consume more video than typical U.S. households:

It's also possible that existing and potential Prime Instant Video subscribers don't really see the service as a second video streaming service. Because Instant Video is part of the overall Prime offering, which includes free two-day shipping and a music service as well as a few other benefits on top of video, customers may not see it as directly competing with Netflix.

Amazon does have one edgeWhile Amazon likely has fewer subscribers than Netflix, its customers are actually more engaged.

Prime members watch video on Amazon an average of 13.4 times in a month, compared to Netflix subscribers who use the service an average of 12.7 times a month, according to research from Consumer Intelligence Research Partners.

That number is a bit misleading, because it includes people who watch Prime Instant Video and people who buy or rent videos from the retailer. If you compare streaming video services alone Netflix is still winning, though, as Prime Instant video users stream an average of 8.3 times a month.

Still, one of Amazon's advantages is that it offers access to more video than just what it streams for members. That works even better when a customer has an Amazon Kindle Fire TV device, which does an excellent job of integrating Prime along with the company's sales and rental options.

Netflix should be wary, but not scaredAmazon has made things very easy for its customers by making Prime such a good overall value. That makes adding Prime (and Instant Video) pretty much a no-brainer for any regular customer of the online retailer.

That's good for Amazon, but it's not necessarily bad for Netflix. The video offerings on Amazon are decent, but well below that of Netflix, which has more overall content and a significant lead in original video.

There's a very strong case for customers to subscribe to Netflix as a premium video provider and Amazon as a secondary source, which also kicks in free two-day shipping on the company's vast retail catalog. That means that Amazon should grow just by staying roughly what it is -- a decent streaming service with some original programming.

That should grow the retailer's share, but it's not likely to shrink Netflix's unless the streaming leader stops making buzzed-about, must-see shows. There is likely room for two players in this space, and it looks like Netflix has the lead while Amazon has successfully beat out Hulu to become the clear number two, with a shot a growing into a co-number one.

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Daniel Kline owns shares of Apple. The Motley Fool recommends, Apple, and Netflix. The Motley Fool owns shares of, 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.

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