The truth about Amazon's $8 monthly planNovember 7, 2012: 11:19 AM ET
Amazon's new monthly plan for its Prime service is a direct assault on Netflix. And it's a huge bargain.
FORTUNE -- Wired's Marcus Wohlson argues that many people will pay for Amazon's (AMZN) new $7.99-per-month Prime service for one of two reasons: either they can't afford to shell out the $79 yearly fee for Prime all at once, or they believe that $7.99 just "feels" cheaper, even though it's $17 more per year.
But there's another reason people will sign up: because they don't rent movies at a consistent pace throughout the year. Blockbuster discovered this in 2003 when it was developing its online movie-rental service in its early days. Later, executives reflected that if their test runs of the service had lasted longer, they might have picked up patterns of consumer behavior that would have helped them compete better against Netflix (NFLX), which ultimately helped crush them. (There were plenty of reasons Blockbuster didn't make it.)
As related in Gina Keating's book Netflixed, as a result of the too-short tests, Blockbuster counted everyone who quit the service as a lost customer, when actually, those people had been planning to come back to the service at a later date. This made the online-rental business, already viewed with skepticism by top management at the time, appear to be less successful than it really was.
Some customers, for example, might watch a lot of movies during the winter, and few or none during the summer months. For them, six months at $7.99 per is much cheaper than paying for a full year of Amazon Prime, which also offers Amazon customers free two-day shipping on their merchandise. (Prime is a gateway service to many of the company's higher margin products.)
As Wohlson notes, the monthly plan is a direct assault on Netflix, since it's priced the same as Netflix is but also offers free shipping on an endless array of merchandise. Some customers might sign up for a single month just to get free shipping for Christmas shopping -- but in that case, Amazon probably counts it as a loss leader. Some of those customers will probably come back, perhaps for good. For the moment, Amazon is simply testing the idea.