Netflix and Amazon: A tale of frenemies forging the future

Amazon.com has Amazon Instant Video. Netflix has its video streaming service. These products are two of the most popular competing video streaming options available. And they both run on Amazon's cloud computing platform.

While Amazon and Netflix are competitors, they're also business partners. At the first user conference for Amazon's cloud computing division last year, the company featured Reed Hastings, president and CEO of Netflix, during the keynote address to discuss how much he loves using Amazon's cloud to run his business a business that competes with Amazon's video streaming service.

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Today, if companies require massive technology resources, they have two choices: Build it in-house, or outsource it. And if they outsource it, there are only so many places where companies the size of Netflix can get instant access to the hundreds and thousands of servers it uses every day. Amazon is one of those. But by providing the massive infrastructure resources, Amazon is enabling its competition.

"It's a fact of business," says Dan Rayburn, who tracks the streaming and online video services and hardware market. "The fact is: Amazon's making money off Netflix." And Netflix is running its business on Amazon infrastructure. Welcome to the newfound world of cloud computing that blurs the lines of business relationships.

They're also two very different businesses, he adds. Amazon.com is built on the premise of high-volume, low-margin e-commerce; Amazon Instant Video and its other streaming services are basically a side business. For Netflix, video streaming is one of the central cogs of the company. Around 2009 company executives started outsourcing computational tasks to the cloud given the massive expansion in video streaming. Netflix has grown from about 1 million hours a month of streaming content to 1 billion. The "cost curve proved that we just couldn't do it ourselves," Hastings says.  

Cooperative competition

Many tech companies are both partners and competitors. Google and Apple have been straddling this line for years with software applications running on Apple hardware devices. And Netflix doesn't just rely on Amazon, it has a number of other partners and services as well. The company basically does everything except store its video content in Amazon's cloud it uses a broad content delivery network (CDN) to actually host the movies. Everything else though, from managing customer account history and bookmarks, the call center operations, and all the controls to manage and monitor the video streaming through the CDN is all done in Amazon's cloud.

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Just like Netflix doesn't own power plants to produce its own electricity, its senior executives don't want to own the data centers to run the company if it can be just bought online. Building out data center infrastructure is not where the company can create competitive advantages, like Amazon's streaming business. Hardware resources are becoming commoditized virtual machines are spun up and down in seconds, and anyone with a hypervisor can do it. Where Netflix can make its hay is in creating original content.

Netflix chief cloud architect Adrian Cockcroft has noted a number of times that if he had extra money, he'd rather make another series like House of Cards—the original programming Netflix has been nominated for awards for making—instead of building its own data centers.

Amazon Web Services which operates semi-autonomously from Amazon.com the retailer  is happy to have Netflix, its parent company's competitor, as a customer. Netflix is the poster-child customer for AWS. If Netflix will run its business on Amazon, anyone can, AWS can say. Amazon Instant Video, the company's competing platform to Netflix's online streaming service, runs on AWS's cloud, too.

AWS Senior Vice President Andy Jassy said at the re:Invent user conference that "Netflix is every bit as important a customer to AWS as Amazon the retailer." Hastings quipped back that Netflix isn't quite yet as big as Amazon. "It's a different business," Jassy laughed.

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