Is Competition Catching Up to Netflix?

By Markets Fool.com


Image source: Netflix

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If you ask Netflix's (NASDAQ: NFLX) management, it'll tell you the competition is no more of a threat today than it was last year or the year before. Despite a big miss on its net subscriber addition numbers during the second quarter, CEO Reed Hastings told analysts "we're pretty confident [competition] is not a factor" because of the churn pattern in multiple countries and the strength in gross additions.

But some analysts think that confidence is misplaced. Axiom Capital's Victor Anthony, for example, believes competition from Amazon.com (NASDAQ: AMZN), Hulu, Time Warner's (NYSE: TWX) HBO, and recent and potential entries from other media and technology companies such as CBS (NYSE: CBS),Disney (NYSE: DIS), and YouTube pose a threat to continued subscriber growth.

Amazon is a big spender with a lot of subscribers

Amazon Prime has more subscribers than Netflix in the United States. Consumer Intelligence Research Partners estimates that the online retailer counts 63 million members of its service, which includes two-day shipping on every order from Amazon.com; movie, television, and music streaming; e-book borrowing; and exclusive access to certain products on Amazon, among other things. By comparison, Netflix counts just 47 million domestic subscribers.

Earlier this year, Amazon launched a stand-alone Prime Instant Video service, which doesn't include all the other perks of Prime membership. Consumers can subscribe for $8.99 per month, $1 less than Netflix charges for its service. The move provides a way for Amazon to compete more directly against Netflix while providing a new way to onboard customers to full-fledged Prime subscribers. (Note that $8.99 per month is actually more expensive than the $99 annual Prime membership, so monthly subscribers have an incentive to become full Prime members.)

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What's more, Amazon has the resources to compete with Netflix in terms of both original and licensed content. It has billions in cash reserves available to spend on content Netflix deems too expensive, such as the Epix movie catalog. It's also proved capable of producing critically acclaimed original series and films.

But interestingly, RBC Capital's Mark Mahaney found that Amazon Prime subscribers are more likely to subscribe to Netflix than regular Amazon shoppers are. In other words, Prime and Netflix complement each other more than they compete against each other. That may be because they both appeal to cord cutters, or it may be that Amazon Prime subscribers probably have more disposable income for premium entertainment networks such as Netflix.

Hulu is grabbing premium subscribers

Hulu dropped its free streaming tier earlier this summer to focus solely on its premium subscription offerings. It also added Time Warner as an investor, which Anthony believes makes it a stronger competitor for Netflix, as Time Warner now has greater incentive to work closely with Hulu versus other streaming video-on-demand services.

The impending launch of Hulu's live TV streaming service in the first half of next year could increase subscribers to its on-demand service. And Hulu is able to lean on its parent companies to ink content licensing agreements and produce originals. (Hulu itself still produces a net loss.)

Anthony cites data indicating that Hulu is growing even faster than Amazon Prime Instant Video on a percentage basis, and U.S. video streaming dollars shifted from Netflix to Hulu in June. At just $7.99 per month, it's less costly than both Netflix and Amazon Prime and may represent better value for viewers interested in quick access to broadcast television series. Still, it represents more of a complement to Netflix than a replacement.

The growing competition

Over the past couple of years, we've seen new a la carte streaming options from HBO, Showtime, and CBS, all of which have over 1 million subscribers today. Disney's ESPN is set to launch its own stand-alone streaming service in the near future after its recent investment in BAMTech -- the streaming technology company behind MLB.tv and HBO Now, among other services. Meanwhile, YouTube launched a premium service, YouTube Red, and it's looking to license films and television series as well.

Indeed, there are more on-demand streaming options now than ever before, and it's likely consumer choice will only continue to expand.

But consumers continue to come back to Netflix no matter what other services they use as well.

A recent survey from RBC Capital shows that 54% of Americans watched something on Netflix in the past 12 months. That's up from 50% in May, and an all-time high, according to the analysts' data. While other services have also grown over the past couple of years, the only service that's grown faster than Netflix in the U.S. is HBO Now/Go, which had a lot of pent-up demand for an a la carte service.

Of course, RBC's survey only asks if a respondent watched a movie or TV show on Netflix, not if the person subscribed. But increasing viewership may be a leading indicator for increased subscriptions. So even if the wording of the survey is a bit offsetting, the trend is clear. The competition isn't catching up to Netflix.

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Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com, Netflix, Time Warner, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.