Netflix (NASDAQ: NFLX) is set to face a bunch of new competition in the very near future. Disney (NYSE: DIS) is launching Disney+ and plans to ramp up investments in Hulu. Still other big media companies are starting their own subscription streaming services. Even tech companies, like Apple (NASDAQ: AAPL), are joining the market with subscription services. Then there's the growing number of free ad-supported streaming options.
In determining how big a threat these new competitors are to Netflix, investors should consider why consumers subscribe to the streaming service in the first place. Analyst Michael Nathanson recently conducted a survey of U.S. Netflix users asking them to rate the importance of certain factors in their decision to subscribe to the service. Here's what he found and what it means for Netflix investors.
All about the experience
While consumers say they love the original series and films on Netflix, what they like even more (in aggregate) is the user experience. Respondents rated not being interrupted by ads, the ability to choose what they watch, and the option to binge-watch as their top reasons for subscribing.
In other words, subscribers really care about the general experience of ad-free on-demand streaming.
Indeed, the most popular shows on Netflix aren't its original series. For example, when Netflix was about to let its license for Friends lapse in 2019 , it caved to subscriber pressure and spent the $100 million to license the 20-year-old show for another year.
If consumers just want an ad-free, on-demand binge-watching service, though, that leaves the door wide open for competition. Apple, notably, creates excellent user experiences with its software and services. That may be one reason the company's been able to grow its Apple Music streaming service so quickly despite having the same 50 million songs as everyone else in the space. A similarly enjoyable experience with Apple TV+ could produce the same subscriber growth results in video streaming -- and potentially steal some of Netflix's market share.
On the positive side, Netflix likely doesn't have to worry about the growth of free, ad-supported streaming services such as Amazon's (NASDAQ: AMZN) planned expansion of IMDb Free Dive.
Focus on what differentiates them
Almost any company can offer a premium ad-free subscription video service with just a little bit of work.
In order to get consumers to subscribe, they need something other competitors don't have. For Apple, that's an install base of 1.4 billion devices, the ability to attract high-quality talent, and the cash to give that talent free rein to do whatever they want. For Disney, it's a plethora of high-quality intellectual property, a handful of top production studios, and the best streaming technology in the industry.
But Netflix clearly has something users want besides the ability to stream content ad-free. If consumers simply wanted an ad-free, on-demand, binge-watching service, there are several options cheaper than Netflix, including Amazon Prime. But Netflix's subscriber numbers are only getting bigger as it raises its pricing. Netflix's pricing power is an indication that subscribers are interested in more than just a good user experience. As a result, Netflix may not have to worry as much about a company like Apple, with its superb design chops, coming in and stealing subscribers away.
A message for the competition
The Netflix survey may be more informative to Netflix's would-be competitors than it is for the company itself or its investors. Any company launching a streaming service needs to be sure to get the user experience right. A poor user experience will overshadow the content no matter how good it is.
Apple, as mentioned, probably doesn't have anything to worry about on that front. But it will be designing Apple TV+ on non-native hardware, presenting some new challenges for the company. Disney, likewise, has proven capable of developing good user experiences for its consumer-facing products.
As new services come to market, investors looking to capitalize on the growth of streaming video should pay close attention to what people are saying about how easy it is to find the content they want and other user experiences.
Find out why Netflix is one of the 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
Tom and David just revealed their ten top stock picks for investors to buy right now. Netflix is on the list -- but there are nine others you may be overlooking.
*Stock Advisor returns as of March 1, 2019
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.