5 Things Amazon Needs to Do to Kill Netflix

In the wake of this week's Netflix (NAS: NFLX) PR and service disaster, many armchair CEOs have been pondering the fate of Netflix, especially in the face of potential competition from the likes of Microsoft (NAS: MSFT) , Apple (NAS: AAPL) , Wal-Mart's (NYS: WMT) Vudu, and legacy content pipes like Comcast (NAS: CMCSA) and Verizon (NYS: VZ) . For my money, the biggest potential winner from this and further Netflix stumbles is Amazon (NAS: AMZN) . I said as much during my own self-indulgent armchair-CEO-ing earlier this week, but I wanted to expand on the challenges and the opportunities that I see Amazon facing as it squares off with Netflix and tries to send it to an early grave, or at least beat it until it's weak enough for Amazon itself to easily swallow.

A few assumptions
Although I have been amazed at the Netflix screwups this week, the streaming entertainment business is still, in my opinion, Netflix's business to lose. I'm sure Reed Hastings and his team will learn from this week's disaster and continue to try to stay ahead of the disorganized mob of potential competitors. Although longtime Netflix users are ticked about the upcoming split and increasing complexity of the system this week, it doesn't take much messing around with alternatives to figure out that most of them are even more difficult to work with than Netflix. Even a Netflix plus (ugh) "Qwikster" model will be easier to navigate and manage than Amazon's instant video service.

Let's also take this as a given: Content will matter. Right now, Netflix has a lead in many kinds of content, and Amazon will need to fix that situation. I think Amazon is already likely to have enough experience in this field to outmaneuver Netflix. Amazon has learned a lot about the sensitivities of old media with its well-publicized scuffles over Kindle content. Moreover, Amazon's scale and variety of products could provide it with a valuable edge in the bidding for top-notch entertainment.

Still, this won't be an easy battle. What does Amazon need to do to up its game and take out Netflix?

1. Copy the good stuff
Netflix has Amazon beat by a million miles in ease of use. Netflix's website features streamlined choices, intuitive navigation, and puts everything you need right under your pointer (or finger). By comparison, Amazon still looks like a 10-year-old e-commerce site, with too many left links, competing text and graphics all over the place, and not even a rudimentary queue or management system. Amazon should emulate these great features of the Netflix experience right now.

2. Top it
Copying the competition may sound unfair, but it's how business works. And Amazon need not provide a slavish duplicate of Netflix's online experience. In fact, I think Amazon knows enough about its current customers to improve greatly on one of the alleged, indestructible advantages at Netflix: knowledge of member preferences. While Netflix knows a ton about the hundreds of movies and programs I've rated, its much-ballyhooed recommendation engine still fails to interest me most of the time. I don't know whether that's because it's trying to steer me toward watching cheaper content, or because it's just bad at what it does, but I think Amazon can equal, or top it.

Look at it this way: Amazon not only knows what movies and music I've purchased through it, it knows that, for instance, I do a lot of my own handyman work at home (thus orders for toilet valves, dangerous power tools, and half-gallon jugs of Bactine). From bits of data like this, it's probably pretty easy for Amazon to figure out that I'd be interested in something like Discovery's Dirty Jobs. That could be a potent advantage for Amazon, something Netflix will never have.

3. App it up
Part of Netflix's current competitive advantage is its streaming app's position in nearly every potential media device, from little set-top boxes to Apple TV, smart TVs, and iPhone, iPad, and even Windows Phone 7 devices. Amazon's streaming app is in fewer places, and in my experience, it's much more difficult to use. Heck, I didn't even know it was possible for my Samsung TV to access the free streaming that I get as part of Amazon Prime, because the Amazon streaming widget is a subwidget of a Yahoo! widget. (I am not making that up.)

Amazon needs to get its developers working on these platforms, and while it's doing so, it ought to make sure the experience is more consistent from device to device. As I have noted before. Netflix's streaming apps vary wildly in quality. The Windows Phone 7 app? First Rate. Xbox 360, pretty good. Samsung TV, pretty crummy.

4. Mr. Bezos, get your Hulu on
The poorly kept secret of the Hulu bidding war includes Amazon among the list of final suitors. In my experience, Hulu operates a first-rate service with the potential to disrupt a lot of Netflix's streaming business. The movie selection at Hulu is pitiful, but Netflix's latest streaming content addition, Z-list programs from Osiris Entertainment, is just as pathetic.

Where Hulu outshines Netflix is in television. It has access to a lot more TV content, fresher content such as 30 Rock, Family Guy, Glee, The Daily Show, and The Office. That means it's beating Netflix on turf it has wanted to own: Reed Hastings has said he's happy with Netflix streaming being "rerun TV," and unfortunately for him, the reruns at Hulu are just better. Moreover, Hulu's service is already a good bargain, at $8 a month, with very few ads, and very good organization and queue management, plus top-notch viewing apps for set-top boxes, mobile devices, Xbox 360, and smart TVs. The user base may be small now, but the system and potential make this a good grab for a partner, like Amazon, that has the financial heft and the customer intelligence to promote it and grow it intelligently.

5. Get the tablet right
There are high hopes resting on the Amazon tablet, but I'm not among those predicting a market-beater. I believe what a tech analyst once quipped, which is that there probably isn't a tablet market, there's an iPad market. Luckily for Amazon, even on the iPad, the media consumption process is still pretty fragmented, requiring a variety of apps and subscriptions. Apple is no doubt working on removing these hurdles and unifying the media consumption experience (with iCloud an important component), and Microsoft is doing similar things with its centralization of Windows Live and Zune for the Windows Phone 7 update and upcoming hybrid OS, Windows 8.

If Amazon hopes that its tablet can be the razor that sells hundreds of millions of dollars worth of blades, it will need to make sure the hardware is hip and the experience is flawless. I'm not overly confident that will happen, given the dated looks and functionality of even the newest Kindle (and I'm a Kindle fan), but Amazon has shown that it gets constant, incremental improvement.

Foolish final thought
As a consumer, I can't wait to see how this plays out. No matter who comes out on top, I think our entertainment gadgets are going to be a lot smarter, more convenient, and more fun in the next few years. Unfortunately for investors, that won't translate into sure profits. The best business ideas always attract excess capital, and that tends to lower returns for everyone involved. That means we all might be better off as Amazon and Netflix subscribers than we would be Amazon or Netflix investors, depending on how low the margins eventually go for providers of streaming video. Winning businesses don't always have winning stocks.

At the time this article was published Seth Jayson owned shares of Verizon, but no position in any other company mentioned here, at the time of publication. You can view his stock holdings. He is the co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool owns shares of Wal-Mart Stores, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Apple, Netflix, Microsoft, and Amazon.com. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a bear put spread position in Netflix. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. 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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