Amazon (NASDAQ:AMZN), Netflix (Nasdaq:NFLX), Coinstar (Nasdaq:CSTR) And Coming Streaming Video Wars

As the majority of media migrates to a digital delivery system, disruptors like Netflix (Nasdaq:NFLX) and Coinstar (Nasdaq:CSTR) are being challenged themselves by the disruptive technology that streams video, questioning the long-term validity of their business models.

Companies like Amazon (NASDAQ:AMZN) are ready to roll out their own video streaming services, which should cut into the revenue of both companies.

That's not to say there won't be a place for renting physical disks, as there will probably always be that, especially for those going into a store with a kiosk like Redbox to lure them into a quick buy.

And there will always be some that prefer a physical disk and service like Netflix offers, although that will be drastically cut back. Netflix even prefers this because of the resultant lower costs associated with streaming video.

So while Coinstar has a lot of room to grow as far as market penetration with Redbox, they also are going to be increasingly involved with a shrinking market. They have benefited from the migration away from video rental stores, and have a very low price point to attract renters.

But even as they attempt to expand into new markets, the overall physical disk sector will continue to decline, although there will be growth based on Coinstar being completely absent from some markets, so there will be some growth even in shrinking markets, based upon no presence in them at all at this time.

So with the idea in mind that there will be a market for physical DVD rentals for some time, albeit a shrinking one, that leaves the growing demand for streaming video, which is the future growth area for movie and TV show rentals.

The question is whether or not Netflix and Coinstar can compete in that sector with large companies like Amazon.com. I'm not sure that they can at a profitable level.

Once video streaming becomes the major means of video delivery, it will become a commodity which will be based on pricing alone, as there is little in the way of differentiation that can be offered by any company.

Even if one company temporarily offers a new plan, it won't be long afterwards the competitors will roll out the same thing.

There will eventually end up being a few large video streaming companies competing in the space, although it'll probably take several years to work out.

One thing those renting physical disks do have going for them, is streaming is still clunky, and even though the standard of video has been lowered, as far as consumers accepting lower quality, as in the case of YouTube and other streaming video sites, what isn't as readily accepted is when the video stutters in stops in starts because of bandwidth issues.

That's similar to the problem AT&T faced when being the sole network for Apple's (NASDAQ:AAPL) iPhone, and they struggled to deliver a quality service.

So that challenge is one that probably gives Netflix and Coinstar some time until the issue is taken care of.

Netflix has already launched a streaming service, while Coinstar doesn't have one in place, which is a huge mistake. But Coinstar has execution issues in their existing business model they have to deal with to compete effectively in the physical DVD market, so have fallen behind in the streaming video growth area so important to those renting videos.

What will probably eventually happen is the two companies will become takeover targets and be assimilated into the giant companies streaming video. I don't see it working out any other way when you consider the financial strength of a company like Amazon, and probably Apple, and others in the near future, who will more than likely enter the market.

Again, all of this is in relationship to a several year period, not in the immediate future, although Coinstar will face more headwinds than Netflix in the short term.

Amazon.com closed Friday at $175.93, gaining $2.22, or 1.28 percent. Coinstar closed at $38.96, down $5.28, or 11.93 percent. Netflix closed at $220.07, gaining $8.58, or 4.06 percent.