The threats to Netflix (NFLX) are many and growing every day. In fact, I think Netflix will have a difficult time surviving because of all the threats.
Strangely, the greatest threat to Netflix is the streaming service’s own success. Notably, Netflix had 148 million subscribers worldwide and 60.55 million subscribers in the United States in 4th Quarter 2018.
That success is responsible for Netflix’s $328.90 share price on 29 January 2019, and for all the competition. Notably, I think the many threats to Netflix (NASDAQ: NFLX) destroy any justification for that stock price.
The many threats to Netflix include:
1. Amazon (NASDAQ: AMZN)
Specifically, Amazon Prime’s video streaming service had 40.12 million subscribers in 2017, Statista calculates. Moreover, Statista projects that number to grow to 64.08 million by 2020.
In particular, Amazon had 30.8 million video-streaming subscribers in America in 2017. Impressively Statista projects that number to grow to 46.3 million U.S. subscribers by 2020.
Amazon threatens Netflix because it uses video as a loss leader for Prime and has vast amounts of cash to burn. For example, Amazon had $29.77 billion in cash and short-term investments on 30 September 2018. Thus, Amazon can spend a vast amount of money to buy or produce content to compete with Netflix.
This streaming service has just 23 to 24 million subscribers, TechCrunch reports. However, Hulu has some powerful backers that make it a potent threat to Netflix.
Notably, the Walt Disney Company (NYSE: DIS) controls 60% of Hulu through its acquisition of 21st Century Fox. Hulu is a threat to Netflix because Disney controls a vast amount of content ranging from Star Wars to Marvel Comics to MASH to Buffy the Vampire Slayer.
Thus Disney could decree that Hulu is the only place to see Star Wars, or Daredevil or Buffy, or the X-Files, or the X-Men. Hence, fans will have to subscribe to Hulu to see their favorite characters. It is not clear if Disney will use such power but it could.
Nor is it clear if Disney’s Hulu partners Comcast and AT&T (NYSE: T) have the power to stop such monopolization. To explain, NBC owns 30% of Hulu, through NBC-Universal and A&TT owns 10% via Warner Media.
3. Smaller subscription services
The threat from these is unclear but a small one CBS All Access has 2.5 million subscribers, TvTechnology reports. However, CBS (NYSE: CBS) is shooting for four million digital subscribers in 2019 and 8 million by 2022.
The threat to Netflix from a service like CBS is a breakout hit that attracts a mass audience. Notably, CBS has not achieved that yet but several competitors including NBC-Universal plan such services.
A problem Netflix could face is an increasingly fragmented video market in which no service can achieve a mass audience. Thus, streaming video could end up like cable TV with so players that no service can attract a large audience.
Alphabet’s (NASDAQ: GOOG) is the greatest threat to Netflix because it is free and easy to access. In fact, YouTube has become part of everyday life for average people.
For instance, Statista calculates that 96% of Americans under 24, 95% of 25-34-year-old Americans, 90% of 35 to 44-year-old Americans, 85% of 45 to 54-year-old Americans, 66% of 65 to 75-year-old Americans, and 51% of Americans over 75 watch YouTube videos. Hence, the vast majority of the population watches YouTube.
Fortunately for Netflix, most people do not seem to take YouTube seriously as an entertainment source. However, YouTube is providing mainstream media, serious competition in areas like news.
A big threat from YouTube could be Alphabet (NASDAQ: GOOGL) gaining content like old movies; or TV shows and putting it on YouTube for free. Fortunately for Netflix that has not happened yet.
However, YouTube’s existence will always be problematic for Netflix. In particular, Netflix and Hulu will have to keep subscription prices low to counter a free alternative.
5. Antitrust actions
Antitrust actions threaten Netflix’s business model because of its similarity to the old Hollywood studio system of the 1930s and 1940s. To explain, back in the Golden Age the same companies owned the studios, distributed the movies, and owned the theaters.
However, in 1948 the U.S. Supreme Court killed the studio system in a ruling called U.S. V. Paramount. To explain, the Supremes ruled that the studio’s use of vertical integration (one company producing, distributing, and showing films) was a monopoly under the Sherman Anti-Trust Act.
Obviously, Netflix’s business model of producing shows and movies it distributes is vertical integration. Thus, courts could force a breakup of Netflix or Amazon or order Disney to sell Hulu.
However, to succeed such a lawsuit will need action from the U.S. Justice Department and sympathetic courts. Neither development seems likely given today’s conservative majority courts and neoliberal justice department.
Moreover, it took the courts 28 years to rule on U.S. V. Paramount, hence any antitrust action on streaming video could take a long time. On the other hand, politicians and broadcasters might push such an action.
6. Programming requirements
Beyond censorship, streaming services will face regulation and censorship at some point. For instance, politicians could demand Netflix show public service announcements.
Notably, the European Union (EU) is already demanding that 30% of Netflix programming in Europe be European, The Verge reports. In addition, governments could require Netflix to add educational programs, culture, news, or children’s content, or to show political advertising.
Programming requirements could kill Netflix by forcing it to produce local original programming for every market. For example, could Netflix afford to produce original dramas for small markets like Norway or Ecuador?
Netflix has built an impressive platform, but it faces many threats that can destroy its business. Investors should be leery of Netflix because of all the threats.