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What Worries Netflix About Amazon Isn’t Just Competition

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Speculation kicked up last month that Amazon (NSDQ: AMZN) is preparing to challenge Netflix in the online-video subscription business. But Amazon may already pose a very different problem to Netflix (NSDQ: NFLX), according to the 10-K the latter company filed last Friday with the Securities and Exchange Commission.

Amazon pops up in two different areas under the “risk factor” section of the 10-K, and not just as potential competition. It turns out Netflix outsources a huge portion of its operations to a division of Amazon called Amazon Web Services. AWS became a Netflix vendor in 2009, and has taken on an increasingly larger role in managing the “majority of our computing,” according to the 10-K.

As the filing states, “Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely impacted.”

Talk about the fox guarding the henhouse: Netflix basically entrusts the brains behind its vast operations–“the largest commercial operation in the cloud,” according to–to a company poised to be it biggest competitor. And switching it to a less compromised vendor doesn’t sound too easy, either.

And just in case the worst-case scenario doesn’t immediately come to mind, Netflix does us the favor of making it clear in the 10-K: “While the retail side of Amazon may compete with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service.”

Of course, that only begs the question, how would Netflix even know if Amazon did do something to gain competitive advantage by sabotaging its service? Sure, that’s pretty damn unlikely to happen given the legal implications.

But for a company with a customer base that goes bananas on the rare occasions the service goes down or malfunctions, it’s a partnership that invites criticism. Bedfellows don’t come any stranger.

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6 Responses to “What Worries Netflix About Amazon Isn’t Just Competition”

  1. @Colin, you kind of miss the point of Netflix using AWS in the first place. The reason to go to AWS is to get away from the “undifferentiated heavy lifting” involved in racking & stacking servers, wiring up the networks, providing power, cooling and a space to run it all in ( If you go with eucalyptus, you’re still tied to those physical efforts, and you don’t benefit from AWS’s experience, learnings and efficiencies (that they use to generate a profit *and* pass along services to you for less than you could create them yourself).

  2. Hey Andrew – I commend you once again on your article! Now that the news is out, most everybody is focusing on Amazon as a competitor to Netflix. But the real story here is about AWS and implications to Netflix. You get my Pulitzer for the day!! OK I’m a bit excitable about this stuff but I am a bit nerdy.

  3. Michael O'Faolain

    What’s surprising about it is not the “risk” of Amazon manipulating the Netflix stream which would have serious legal implications, but rather that even if you as a retail customer use Netflix and don’t use Amazon, Amazon gets some of your money perhaps allowing it to compete against Netflix more effectively. Talk about win-win….