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Lighting a fire under Netflix

Does the Kindle Fire push Amazon closer to a Netflix acquisition?

(Photo: Ryan Anson/AFP/Getty Images)

When Amazon CEO Jeff Bezos revealed the Kindle Fire, the verdict from tech pundits was pretty much unanimous: it was no iPad killer. However, as more astute observers have pointed out, the tablet is not supposed to compete head-to-head with the iPad. Bezos himself made an even greater distinction when talking about the Kindle Fire to Bloomberg Businessweek: “We don’t think of the Kindle Fire as a tablet. We think of it as a service.”

At just US$199, the Kindle Fire is designed to appeal to those who want some of the functionality of a tablet, but are unwilling to drop $500 for an iPad. More importantly for Amazon, the tablet is supposed to encourage users to buy more Amazon products and services, which is part of the reason why the company is selling the device so cheaply.

In this light, one of the companies with the most to lose if the Kindle Fire takes off isn’t a tablet maker at all—it’s Netflix.

Amazon operates a service called Prime that gives users unlimited free two-day shipping, and cheap one-day shipping in addition to free streaming of roughly 11,000 movies and TV shows in the U.S. Anyone who purchases a Kindle Fire (not yet available in Canada) will get a free 30-day trial of Prime. Ordinarily, the service is just $79 a year.

The selection doesn’t come close to the 51,000 titles available through Netflix, but the offer is nevertheless compelling, and Amazon is aggressively building up its library. (It only had 6,000 titles available through Prime this past summer, for example.) Netflix has also made changes that have only angered customers, such as its price hike in July. CEO Reed Hastings even apologized for the clumsy way he handled that situation, writing in a September blog post, “I messed up.” The further revelation that the company would be splitting its streaming and DVD-by-mail businesses didn’t do much to improve customer confidence, however. Because of the changes, Netflix had to lower its subscriber growth estimates for the third quarter, to 24 million from 25 million.

Hastings insists these moves are necessary for the future of the company, and they may well be, but the fallout leaves the door open for competitors, particularly Amazon. After all, anyone who purchases a Kindle Fire and has access to Prime has little need for Netflix. In fact, the move is prompting renewed speculation that Amazon will simply buy Netflix.

“We believe there is a high likelihood that Amazon will…purchase the streaming business of Netflix,” writes Mayuresh Masurekar with Collins Stewart in New York in a recent note. The primary reason would be to get access to the Netflix library, and its customer base. And the company could theoretically pull off such a purchase; the share price of Netflix has nosedived more than 60% since its high in July, with a corresponding reduction in market cap.

But with Amazon making so much headway in acquiring content on its own, the company may not even need to purchase Netflix to expand. Either way, the future of Netflix is considerably cloudier than it was at the start of the year. It’s far from the only streaming service around anymore, and it will have to fight harder and pay more money to acquire content rights.

Hastings knows this, of course. He wrote in his post that his biggest fear at Netflix has been that the company couldn’t pull off the transition from DVD-by-mail to streaming. “Most companies that are great at something…do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover.”

Netflix is a long way from that unfortunate position, but the Kindle Fire could push it one step closer.