Trading the TV Wars

The first volley in an epic battle over the domination of our global TV content had been shot a long time ago, whether it’s Comcast’s global ambitions or the start of the Netflix online streaming service. Yet with the announcement of Fire TV this week by Amazon, investors got the sense that the first real shot in this war of global domination has been fired just this week alerting investors to the  battle among Comcast, Netflix and now Amazon. This is a battle worth billions on top of billions. And investors, on their end, are trying to figure out just one thing, and that is who will win and therefore which stock to put your chips on.

Amazon on Fire

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Amazon’s Kindle changed how people read books; the question is can Fire TV do the same for how they watch television? Earlier this week, Jeff Bezos, the CEO of Amazon, announced that they were offering Fire TV, a device to make direct TV streaming even easier and which would be more than a match for its rivals. Fire FX would effectively put Amazon into direct competition with Netflix, the largest U.S.-based video subscription company. In fact, the Fire TV device would allow customers to access Netflix programming in addition to other services, thereby eliminating their need to use Netflix. Until the Amazon announcement Netflix’ only real competition had been with Comcast which also provides digital broadcasting services, but now it’s become a three-way competition to control the digital streams.

Amazon’s Fire TV will, like Netflix and Comcast, offer viewers a bouquet of digital programming services including video, TV and games. However, getting into the digital TV streaming niche wasn’t the sole reason that Amazon management decided to enter into the market and get in Netflix and Comcast’s proverbial faces. What Amazon is hoping is that Fire TV will drive up sales overall because in order to effectively use it, customers must first subscribe to Amazon Prime at $99 a year. TV streaming convenience aside, Prime customers also get free 2-day shipping, an important factor among Amazon’s 20+ million Prime customers who tend to be among Amazon’s most prolific shoppers.

Rotate to Amazon

Now you probably have a few questions; what’s the bottom line, what are implications on Wall Street and, more specifically, on the relevant stocks given this heated up competition? Quite simply, it will be a rotation from Netflix to Amazon. Netflix has been considered the leading provider of internet based content with largely no competitors except Comcast which is more of a traditional play on cable TV rather than online content. Yet Amazon’s entry into the market means Netflix is no longer the sole player. In fact it’s deeply threatened by the entry of its bigger rival Amazon. The past five years have been lucrative for Netflix investors; the stock has been up by 700%, more than twice the returns of the Amazon stock. Netflix’s P/E ratio is a staggering 196 times, compared to a company like Facebook which trades at around 30. This is the result of great expectations that Netflix will dominate the digital video content niche. Yet with Amazon’s entry into the market now in full throttle and Amazon priced cheaper and perhaps with a superior financial position, Amazon might get a significant market share leaving Netflix exposed to selling and Amazon, a good play on digital TV. So perhaps if you were riding the wave of digital TV, its time to switch to a different horse, an Amazon kind of horse.