Netflix: Competitive Trend Accelerating?

| About: Netflix, Inc. (NFLX)

Summary

Hulu recently signed a partnership with Sony Pictures.

Increased competitive pressure from domestic OTT services is a negative sign for NFLX.

Remain cautious on NFLX.

Netflix (NASDAQ:NFLX) is facing growing competitive pressure from domestic streaming services and I suspect this was a key factor in last quarter's miss on domestic subscriber growth. My suspicion has been gradually playing out as competitors such as Hulu, YouTube (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) have been ramping up their content libraries to take a bigger share of the SVOD subs base. Additionally, online TV such as Dish's (NASDAQ:DISH) Sling TV and Sony (NYSE:SNE) Vue are disrupting the conventional media channels and presenting a challenge to NFLX given the growing number of OTT options available for the US subscribers.

The latest challenge comes from Hulu, which signed a multi-year deal with Sony Pictures for older TV shows and movies that include "The Shield," "Party of Five" and "Dawson's Creek." Movie titles that will now be on Hulu include "Jerry Maguire" and "My Best Friend's Wedding." This deal comes after Hulu struck a licensing agreement for Seinfield at a price of $700k per episode. Overall, this is a positive for both Disney (NYSE:DIS), Comcast (NASDAQ:CMCSA) and 21st Century Fox (NASDAQ:FOX) (NASDAQ:FOXA) as the content and cable companies are facing growing cord-cutting pressure from their subs base.

Most notably, Disney's ESPN network, which is widely considered the glue that holds the cable bundle together, has been witnessing multi-year decline in subs. Comcast is also facing risks to cord-cutting as its cable subs shift to OTT content. Fox faces similar risk. Growing Hulu and transforming the platform is beneficial to all three companies in that it gives them exposure to the fast growing SVOD segment. Also worth noting, Hulu has yet to disappoint over the past year, signing agreements with Time Warner (NYSE:TWX), AMC Network (NASDAQ:AMCX) and Discovery Communication (NASDAQ:DISCA) (NASDAQ:DISCB) (NASDAQ:DISCK). All the deals position Hulu to become the next often-visited online TV platform, in my view.

Growth of Hulu is a negative to NFLX in that the quality of its rivals is growing and this is not a Hulu-only case. I note that both YouTube and HBO are also offering premium content to viewers, while AMZN has been building up its content (see - Amazon 2016 Outlook: Ready For Prime Time). The US OTT market is perhaps the most mature in the world as users migrate from traditional media. NFLX was certainly the leader with this trend and is one of few companies that successfully migrated its business model to digital. I see NFLX gradually losing its competitive advantage and appeal as viewers migrate to alternative platforms given the increased options consumers now have. With an estimated 2.5% of US TV households cutting the cord and moving to OTT services, US viewers have more OTT options than before. The availability of competing services does not bode well for NFLX, which was widely considered the prime OTT platform before the cord-cutting trend materialized.

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