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Netflix’s Competitive Moat Isn’t as Wide as You Think

James Brumley

Credit has to be given where it’s due. Netflix (NASDAQ:NFLX) has become the gold standard of the streaming video market. It enjoys more market share than its rivals, and Netflix stock continues to bump into new highs despite a multiyear streak of negative cash flow.

In fact, a trio of analysts just upped their views on the company, all essentially celebrating the idea that consumers everywhere are more likely to choose it before any other on-demand provider.

And, maybe those pros are right. Maybe Netflix is the name to beat and will remain the streaming video market’s top dog in perpetuity.

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If you think Netflix actually has a moat, though, think again. Once any other player does what Netflix is willing to do, it’s going to have what Netflix has. And, what Netflix is willing to do is spend insane amounts of money on content just to garner market share.

To that end, a new rival may finally be positioning to do just that.

About That Moat…

Piper Jaffray and Monness, Crespi, Hardt & Co were both willing to up their price targets on Netflix stock earlier this week, but it was GBH Insights that shook the chain in earnest. The research outfit upped its price target on Netflix stock — currently the highest — explaining:

“Our bullish thesis on Netflix is based on our belief that the company’s competitive moat, franchise appeal, ability to increase international streaming customers through 2020, and original content build out will translate into robust profitability and growth.”

Analyst Daniel Ives’ point is well taken. Netflix added another 7.4 million users last quarter, bringing the total to 125.0 million, and the company’s home-grown content has supplied more hits than misses. The fact that Netflix stock just hit a record high despite market-wide turbulence speaks volumes about investors’ agreement with the premise.

Ives’ take on Netflix’s “competitive moat,” however, might be a little misguided. It may have a significant head start on other would-be players, but the only barrier to entry into the video streaming game is an unwillingness to copy the Netflix model and copy how Netflix has executed its plan.

But such a competitor is approaching on the horizon.

Alliances Forming

Yes, that competitor is the combination of Walt Disney (NYSE:DIS) and Twenty-First Century Fox (NASDAQ:FOXA), if Fox agrees to the recently upped acquisition offer (and it appears it has). Then again, that assumes cable and media giant Comcast (NASDAQ:CMCSA) won’t raise its bid; it outbid Disney just a few days ago.

Regardless of who ends up owning what, all potential combinations end up taking aim at Netflix’s growing dominance of the streaming video market nobody fully appreciated a decade ago.

Disney has already tipped its hand, launching a streaming version of its sports-oriented property ESPN, and planning a more family-oriented subscription service that would readily feature its Star Wars and Marvel franchises. Presumably, Mickey Mouse and other Disney Channel favorites will also be accessible.

That would be a formidable opponent to Netflix’s streaming service on its own, but the addition of Fox’s content gives Walt Disney a chance of becoming the preferred provider.

Comcast’s intentions aren’t quite as clear, but inasmuch as it’s already launched its (admittedly uninspired) streaming TV service called Xfinity Instant TV, clearly it’s less than thrilled with the current direction and speed of the cord-cutting movement. It could add Fox’s programs and movies to its NBC subsidiary’s content — a subsidiary that also includes Universal Studios.

It’s still not a Disney, but it’s enough to lay a healthy foundation for a more Netflix-like service down the road.

Comcast also has something Netflix doesn’t: a few million existing cable and high-speed internet subscribers. It’s the company’s best first prospects for the rival service.

Bottom Line for Netflix Stock

Still, just because a competitor has the potential to compete with Netflix doesn’t inherently mean it will. One only has to look at Hulu — a consortium co-owned by the aforementioned NBCUniversal, Fox and Disney — to realize that an alternative hasn’t upended Netflix.

There’s a reason Hulu hasn’t been competitive with Netflix, though — a handful of reasons, actually. One of them is the fact that it simply hasn’t been granted the marketing firepower it needs. Another (and bigger) reason is that the trio of companies running Hulu were still competitors outside of Hulu, and were wary of feeding their enemy.

But if Disney owns Fox or if Comcast owns Fox, that will give a commanding control of Hulu to one company, and then things change. Disney CEO Bob Iger plainly said in December when the Fox acquisition first came into focus:

“Owning a third of [Hulu] was great — but having control will allow us to greatly accelerate Hulu into that space and become an even greater competitor to those already out there. We’ll be able to do that not only by putting more content in Hulu’s direction, but by essentially having control to the extent that managing Hulu becomes a little bit more clear, efficient, and effective.”

It remains to be seen if Hulu will be the specific vehicle used to take aim at Netflix,  even if it’s the most comparably priced service. There’s little doubt, though, that in all of this, another serious streaming giant is in the works. It just needs some time and TLC.

Owners of Netflix stock are going to find that moat isn’t so wide after all.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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