Pitz: Amazon Instant Video is Just Another Experiment

Amazon recently announced a video streaming program with unlimited access to over 5,000 titles for $79 per year which replicates and undercuts the Netflix instant streaming model. This is in addition to a 90,000 title content arsenal already available for rental or purchase. UBS analyst Brian Pitz recently downgraded the stock to neutral with a $180 price target (down from $195) on concerns that the streaming service will raise costs, and hit margins. Pitz is concerned that Free Streaming wasn't part of the original guidance and content, distribution and technology costs will have material impact on margins. Since that report, Amazon stock has dropped nearly 10%.

Pitz is ignoring that Amazon is an expert at low investment market experiments. For example, they competed with Ebay allowing 3rd party merchants to auction, later they created Z-shops as a separate 3rd party merchant center and now they completely integrate 3rd party merchants. Amazon has a huge Web Lab where they constantly conduct experiments. Bezos said in a Harvard interview "it is a huge laboratory for us, and we’ve put a lot of energy into trying to figure out how to be very low cost with those experiments so that we an run a much larger number of them". The Kindle is another experiment, with incremental moves to warrant further investment. They started free shipping membership with Amazon Prime, e-commerce Infrastructure services for 3rd party merchants, and selling excess capacity turned them into the cloud computing leader. They've been trying to crack the code for years in supermarket delivery with regional experiments . These are just a few examples where they started with incremental disciplined experiments which lead to core businesses.

Furthermore, Pitz is hammering Amazon because of infrastructure costs. He is missing the brilliant cloud infrastructure that Amazon has created. Traditionally, a company builds expensive dedicated infrastructure capacity and amortizes it over future utilization but Amazon is the cloud computing juggernaut and they have dozens of services and channels to monetize excess capacity. The bottom line is that infrastructure investments are going to cloud capacity / inventory, and are not dedicated to streaming.

Will Amazon eventually win the streaming wars? Facebook recently announced they are putting their hat in the ring and with Netflix, Apple, Hulu, and Google waiting on the sidelines, its going to be anybody's bet. Interestingly, Netflix is using Amazon's cloud infrastructure which gives Amazon a n edge in understating the rules of the road. IMHO Netflix has the most to lose and consumers have the most to win.

So is Pitz right in lowering guidance? I have no idea but if, as he claims, Amazon's Streaming investment is the reason for the downgrade, then Amazon stock is starting to look attractive.