Zencoder's pricing has been high to say the least. For example, for a Medium High-CPU instance (about 2x 2.5GHz processors) I should be able to encode video faster than real time (encoding a minute of video should take under a minute). At $0.165/hour, that's $0.003/minute. Zencoder is charging 10x that amount for many people (Zencoder charges 2-5 cents per minute depending on whether you commit to a large package of minutes or not). Plus, Zencoder can possibly combine spot instances and reserved instances to get better. Now, that's not to say I haven't been a happy Zencoder customer - for the volume of video that my company does, it wouldn't pay for us to run a server ourselves. Zencoder is immensely cheaper than rolling our own solution. However, it seems like it's also a place where another company could come in and disrupt Zencoder a bit. Even if you weren't Amazon, if you built up enough of a customer base, you could likely have undercut Zencoder's rates.
I think one thing to note is that companies don't offer the lowest price they can. In fact, in an oligopolistic market like this, economics suggests that the price (if services were undifferentiated) would drop to the Nash equilibrium. Looking at Amazon's pricing, it seems clear that they want to provide a good value proposition compared to Zencoder, but they're still charging nearly $1/hr which certainly allows competitors to match that price on EC2 hardware and shows that Amazon isn't offering the bottom of the barrel price.
It's never fun to compete with your infrastructure provider (or any well-run company like Amazon even if you aren't relying on them). However, we see these things happen and companies on both sides survive.
Amazon might very well have a price advantage, but other parties that can offer better quality of service or better L10n or whatever will still attract customers. This is how markets are "supposed" to work.
>As long as Zencoder runs on AWS, barring some magic encoding technology, it can never be cheaper than Amazon could theoretically go.