In an age when cable networks and over-the-top providers of streaming content are vying in every way possible for a bigger number of eyeballs, Netflix (NFLX) has many competitors. And while current and potential Netflix shareholders should be aware of which companies pose the biggest threats to the company, they also should question whether those threats really matter. Competition matters in every industry, but Netflix's situation could be different. Read on to find out more about Netflix as well as its biggest competitors and what they offer.
- More people are cutting the cord and turning to streaming services for their film and television content.
- Netflix remains the world's largest subscription streaming service with roughly 183 million paid subscribers worldwide as of March 2020.
- The company's competition could steal market share—namely Amazon, whose Prime Video service is cheaper and boasts 150 million subscribers.
Who's Watching What?
What people are watching and how they're watching it is constantly changing. According to Nielsen's Total Audience Report from Feb. 2020, consumers are connecting less to their television sets compared to the same period from the previous year, turning more to apps and web-based streaming on smartphones.
On average, adults spent three hours and 27 minutes a day connected to live TV in 2019, compared to three hours and 44 minutes during the same period in 2018. But the biggest viewing increases come from streaming time on smartphones, which now surpasses live television viewing. People spent just under four hours a day on their phones in the last three months of 2019, compared to two hours, 31 minutes during the same time period in 2018.
Data reporting site Statista showed 74% of American consumers used subscription video-on-demand services in 2019—a jump from the 64% it reported in 2017. The site said Netflix was the number one subscription-based streaming service in the country. Forbes reported that 182.5 million Americans will use streaming services to view content—that's more than 55% of the population.
According to the Feb. 2020 "Nielsen Total Audience Report," 93% of U.S. consumers with streaming service subscriptions say they plan on either increasing or keeping their existing streaming services.
Netflix: An Overview
Netflix is one of the biggest contributors to the cord-cutting phenomenon. This is when consumers forgo traditional cable network TV in favor of an alternative—usually streaming services. This phenomenon is helping Netflix crush its competition for one simple reason: The company is providing quality original content at an affordable price.
Netflix is available to consumers through its app, smart TVs, game consoles, streaming media players, and Amazon's Fire TV. The company had about 183 million paid subscribers across the globe at the end of the first quarter of 2020. This represents a year-over-year subscription growth of 22.8%. Netflix is predicting membership growth will continue in the second quarter of 2020, with the company forecasting an increase of 25.6% for the quarter.
As for how much it costs? There are several options available for subscribers:
- The Basic Plan: This is $8.99 per month and comes with very few features. Subscribers can only stream on one device at a time, and it's restricted to standard definition (SD).
- The Standard Plan: At $12.99 a month, this increases viewing to high definition (HD) on two different screens.
- The Premium Plan: This plan is the highest one at $15.99 per month, allowing subscribers to stream on four different screens simultaneously in ultra HD.
Netflix makes money by offering a different range of viewing options from country to country. The company is constantly cycling through titles every month. The options range from feature films, documentaries, anime, and television shows, including Netflix-produced original titles. Some of the company's most famous titles include Stranger Things and Orange Is the New Black. And the list keeps growing.
For the first quarter of 2020, Netflix reported revenue of $5.77 billion, which was in line with the company's guidance due to the U.S. dollar appreciation over other currencies. Net income came in at $0.71 billion for the quarter. These figures increased from the same period in 2019—$4.52 billion in revenue and net income of $0.34 billion. The company cited three reasons for its financial performance for the quarter: 1) increased membership growth due to home confinement, 2) a decline in international revenue due to a sharply rising dollar, and 3) delayed spending on content development due to production shutdowns.
The Streaming Landscape
There are several different competitors that threaten to chip away at market share from Netflix, including Amazon, Hulu, and the streaming service from Walt Disney launched in Nov. 2019, as well as some of the cable channels' subscription services.
The biggest competitive threat to Netflix is probably Amazon (AMZN). As of the fourth quarter of 2019, Amazon Prime Video had about 150 million subscribers—a number that's been growing at a fast pace over the past two years as the company has increased production of its original content.
If you're an avid Amazon customer, you're probably going to benefit from its Prime membership, which offers free two-day shipping for purchases as well as the streaming subscription rolled in. The cost for this membership is $119 per year or $12.99 if you pay monthly. The subscription costs much less if you're a student: $59 per year or $6.49 per month.
If you're looking at going solo and getting the streaming service on its own, you can expect to pay $8.99 per month—the same cost of Netflix's basic plan, and much less than its premium subscription.
Prime Video offers subscribers access to thousands of titles, ranging from feature films, documentaries, to television. Like its rival Netflix, Amazon Prime also has its own original films and series including The Marvelous Mrs. Maisel and Tom Clancy's Jack Ryan. The service is available through the Prime Video app, through smart TVs, game consoles, streaming media players, and Amazon's Fire TV.
The big news for Hulu came in May 2019 with the announcement of a deal between Comcast and Disney which had Disney purchasing Comcast's stake in Hulu for a reported $5.8 billion. This puts Disney in full control of Hulu and consolidates the competition as Disney makes a big push into the streaming services field.
Hulu's numbers are much less than those who subscribe to Netflix and Amazon. Hulu hit 30.4 million subscribers by the end of 2019. The company originally started off as a DVD rental business but later expanded to digital streaming.
Hulu offers a growing number of options and add-ons. Hulu offers four levels of subscription plans: basic, premium (no ads), basic plus live TV, and premium plus live TV. As of March 2020, monthly prices start as low as $5.99 for Hulu and $54.99 for Hulu + Live TV. For an additional fee, the company offers premium add-ons, such as HBO, Cinemax, and Showtime. You can purchase subscription bundles from Hulu that include Disney+ and ESPN+.
There's been a lot of hype around the streaming service offered by Walt Disney. Disney+ is an on-demand, commercial-free service which houses the entire library of Disney movies along with original Disney TV series. Included in the library are titles from Pixar, Marvel, features from the Star Wars enterprise, as well as National Geographic options. If that's not enough, the service also includes every season of The Simpsons and 21st Century Fox films. Subscribers get unlimited downloads to watch wherever and whenever they choose.
Netflix and Disney had an exclusive relationship, at least until the studio decided to jump into the streaming war. When Disney announced it was going to launch its own service, it ended the deal it had with Netflix. Netflix offered a number of titles from the studio but agreed to cut them all from its lineup in 2019.
As of May 2020, package subscriptions to Disney+, Hulu, and ESPN+ cost $12.99 per month. Subscriptions to just Disney+ cost $6.99 per month or $69.99 per year.
The Real Threats
This first and most obvious threat to Netflix is programming costs. The company announced it would spend up to $15 billion on content in 2019. That’s a big budget to spend on content and bidding wars could lead to even higher costs. But Netflix is growing its top line so fast that it could help offset this concern.
A related concern is free cash flow (FCF), which for the first quarter of 2020 came in at +$162 million. This is a significant improvement compared to the -$460 million posted in the same quarter of the previous year. The company says its FCF has improved due to its growing operating margin and profits.
However, whether Netflix can continue this growth might come down to whether or not the company can outgrow its expenses. If Netflix wants to increase the odds of making this happen over the long haul, it’s likely going to need to keep churning out big hit after big hit.
The other concern is much simpler. As of May 15, 2020, Netflix has a trailing 12 months price-to-earnings ratio (TTM P/E) of 88.17, making it a relatively high growth stock. If the broader market were to falter due to investors thinking it is overvalued, Netflix would not be seen as a place to hide.
In fact, those invested in Netflix might panic and sell to move into safer names. This would hit the stock hard. And that’s what investors care about most: the stock price. The good news is that no direct competitor to Netflix is within the same stratosphere when it comes to quality and price. Therefore, if this remains to be the case, it should find a way to be a winner for some time.
The Bottom Line
Netflix dominates its competition in streaming—that’s not a concern. The real worries are programming costs and stock valuation in what is likely to be a volatile stock market over the next several years. This can lead to some painful drops, but if you’re looking at the underlying business of Netflix, it still could be a long-term winner.
At the time of initial writing, Dan Moskowitz did not have any positions in NFLX, AMZN, CMCSK, TWX, FOX, or DIS. This post has been updated throughout.