The latest evidence that Amazon (s AMZN) is readying a subscription streaming service emerged over the weekend, as screenshots showing a video streaming service linked to a user’s Amazon Prime appeared on Engadget. The screenshots depict a new “Prime Instant Videos” service that reportedly has unlimited instant streaming of “5,000 movies and TV shows at no additional cost” to Amazon Prime subscribers, who pay about $80 a year for the service.
Amazon has long been rumored to be interested in rolling out a subscription video service that would augment its existing video-on-demand services and allow it to compete head-on with Netflix. (s NFLX) The online retailer recently bought out European Netflix lookalike Lovefilm, giving it the ability to offer streaming and DVD-by-mail subscriptions overseas. That deal could accelerate its plans to make similar offerings available in the U.S.
If launched as an add-on to Amazon Prime, as is widely expected, the new streaming service would have a built-in group of users who already pay once a year for access to free, second-day shipping. But adoption of the streaming service could prompt more users to take advantage of Amazon Prime’s lower shipping costs, which could translate to higher overall sales for the online retailer. In other words, Amazon could use online streaming as a loss leader to accelerate sales in its other lines of business.
That’s an interesting departure from Netflix, (s NFLX) which is leveraging its own streaming service as a way to reduce the amount that it spends on shipping. Despite the growth of streaming at Netflix, the cost of maintaining its legacy DVD-by-mail business still holds significant costs for the company. While growth in DVD consumption is slowing, Netflix still sends out more DVDs today than it did a year ago, due in part to growth in the number of subscribers it has brought on in that time. The company has publicly said those costs run upwards of $600-700 million a year.
Netflix is seeking to control those costs, mainly by getting more users to watch streaming titles rather than DVDs. The cost of streaming video is extremely low compared to the cost of mailing out a disc, with most costs wrapped up in the licensing of content rather than the actual delivery.
But for Amazon, which has distribution centers throughout the U.S. and makes its money from actually selling physical product, the appeal of offering a streaming video option is mainly tied to its top line. In this way, Amazon Prime is a bit of a Trojan horse — viewers may sign up for the streaming, but once they have it, they may plan to use it for the actual shipping benefits. And the more those viewers spend, the better off Amazon will be.
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