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Netflix (NASDAQ:NFLX) faces competition in digital video-on-demand and pay-per-view offerings from players like Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), DirecTV (NASDAQ:DTV) and Dish Network (NASDAQ:DISH).

A recent Federal Communications Commission (FCC) decision is likely to increase competition for Netflix as it clears the way for new films to be made available on-demand before such films are available on DVDs. The FCC decision allows movie studios (like Paramount, 20th Century Fox, Disney Studios) to block analog signals on TVs and video recorders when consumers purchase their latest on-demand movies.

This decision was pushed for by Disney (NYSE:DIS), Time Warner (NYSE:TWX) and Viacom (NASDAQ:VIA) to reduce the likelihood of content piracy, especially for new films where instances of piracy tend to be high.

While this move gives movie studios more control over their content offering, it also gives a boost to cable providers that compete with Netflix to deliver the latest films to consumers.

Studios Get More Control and Consumers Get Early Access

As analog signals are easy to copy and prone to piracy, movie studios will be offering new on-demand movies only in digital format. This will limit access to the latest on-demand movies to digital subscribers.

Epix, a cable-TV channel shows movies from its parent studios nine months after their release in theaters, while other channels like HBO and Showtime show movies after a 12-month window. With availability of new movies even before DVD releases (DVDs are generally released after a 4-month window), consumers with digital subscriptions can choose to watch movies on-demand at a certain price. Moreover, the trend of analog customers shifting to digital platform is quite evident in the US, and should result in equal opportunity for all consumers, over time.

Early Access Strengthens Video-On-Demand Offerings of Cable Providers

Cable providers are facing competition from emerging platforms for video viewing like Hulu, Netflix and iTunes. In order to retain customers, cable providers are trying to improve customer service and diversify their offerings by strengthening video-on-demand services with initiatives like TV Everywhere. Although they currently lag behind Netflix in content as well as offering, the availability of new movies for purchase as a result of FCC ruling should help.

Netflix Needs to Improve Online Content Catalog to Compete

Netflix has a compelling business model that allows customers to rent DVDs as well as watch online content via streaming for a monthly fee of as low as $8.99. The company has been striving to improve its online catalog, but still does not offer the latest new releases online. We believe that Netflix will face additional pressure to improve its content catalog as a result of the FCC decision and the boost to cable providers.

Netflix’s subscriber base has grown from about 4.2 million subscribers in 2005 to over 12 million in 2009. The company’s growth is dependent on its subscriber count and the ability to continually attract new subscribers. You can modify our forecast for Netflix subscribers below to see how Netflix’s stock could be impacted if subscriber growth were to slow as a result of greater consumer use of video-on-demand offerings from cable providers.

DIsclosure: No positions

Source: Netflix: FCC Decision Could Increase VOD Competition