On-Line Competition: Netflix and Amazon Go Mano a Mano

One of the emergent truths of on-line competition is that threats can emerge from unforeseen directions.

Andrew Wallenstein has the story in PaidContent:

"Speculation kicked up last month that Amazon (NSDQ: AMZN) is preparing to challenge Netflix in the online-video subscription business. But Amazon may already a 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 SearchCloudComputing.com—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.