While Netflix (NASDAQ:NFLX) continues to generate its share of both bullish and bearish commentary, here on Seeking Alpha and elsewhere, one thing that is not in dispute is that Netflix is a pure-play streaming stock. Unlike Amazon (NASDAQ:AMZN) or other competitors, it has no other business to fall back on.
That means that aside from actual subscriber numbers, the most important thing for investors to know is simply whether or not people are actually watching Netflix. Is it continuing to draw viewers to its content? Has another competitor begun to eclipse it?
Unfortunately, the data we use to measure this might be distorted, and deceptive.
It has become almost a matter of routine that every three or six months, when Sandvine and other Internet research companies update their downstream traffic reports, nothing changes. Netflix is way out in front, YouTube is a distant second, and everyone else is so small they are actually further behind YouTube than YouTube is behind Netflix. Amazon , iTunes, Hulu, all the big Internet names. None of them can catch Netflix.
As Netflix management never tires of reminding everyone. Sandvine traffic data features prominently in most Netflix earnings statements. Last quarter, they revealed the Sandvine numbers for 2015, which showed Netflix at 37% of peak download traffic and Amazon Video at only 3%.
And that is all of Amazon Video, including purchases and rentals as well as Prime streaming, which presumably is only a fraction of the whole. In fact, Prime and Video transactions combined barely match iTunes or Hulu, which each offer one but not the other. Apparently, Amazon Prime is getting trounced.
I have no doubt that Netflix is indeed far bigger than Amazon Prime Instant Video. However, I have recently begun to have doubts that the gap is as big as this. What's more, if and when that gap ever does shrink substantially, I don't think Sandvine will even know until the process is well underway.
The fault is not with Sandvine, but rather with the assumptions some make when they read its data. Sandvine is very careful to note when it releases the numbers that it is releasing a peak download report, what is taking up the pipes when data traffic is at its highest.
The assumption is that Internet traffic at peak time probably looks not too different from what it looks like the rest of the day, at least on the consumer side. The whole point of Netflix and other services is to offer an on-demand library of content whenever you want it, so there is no reason for customers to suddenly prefer another service off peak times. They don't have to match a broadcast schedule or wait for a program to come on.
In the main, I think this assumption is probably valid. However, there is one major difference between Netflix and Amazon that might be skewing the data.
Last year, Amazon made a significant change to their online video strategy. Since 2013, Prime Instant Video has allowed members to download their videos for offline viewing. But the option had always been limited to Fire devices, including the Fire tablets and the Fire phone. But as of September 1st, downloads are available on all iOS and Android devices. The feature is one of the few clear advantages Prime Instant Video has over Netflix, which does not offer downloads on any of its content.
When the download option was limited to Fire devices it didn't affect the data much. Amazon's Fire Phone was a colossal bust and even its tablets have never really matched the sales volume of the iPad and Android. But now, every Prime member can take advantage of downloads on their mobile device even without a Fire.
The reason this matters is that downloads are not reflected in Sandvine's data. Sandvine is measuring data traffic, not viewing. The viewing is essentially imputed from the download data. But if a customer downloaded a Prime title earlier in the day they don't show up in the data, even if they are watching in the evening at peak time the same as the Netflix customers are.
How Big Is It?
Those who would dismiss this as a minor detail should not be so quick to assume, in my opinion. The impact of being able to time-shift viewing of streamed titles could potentially be quite significant.
Anecdotally, I know for a fact that some people I know personally are using their Prime memberships to download regularly. But of course that proves nothing, and it is impossible to know how widespread the phenomenon is. What is not in dispute, however, is that Amazon now offers customers the option of using Prime Video this way, and so far, its competitors largely don't. YouTube allows downloads for its Red customers, but YouTube does not have contracts with major content providers to provide complementary streaming video. Netflix and Hulu do not offer downloads at all.
So if downloads are happening in large numbers, they are almost certainly almost all accruing to Amazon, even from customers who would otherwise use Netflix. And most of the activity is probably hidden from our view.
While Amazon's share of peak traffic is small, streaming video's share is extremely large. The combined totals for Netflix, YouTube, Hulu, and Amazon were 61% of peak download traffic. So if the total demand for downloads is equal to even 10% of the demand for peak live streaming, that would add 6 percentage points to Amazon's total, tripling it. Even if half of Netflix/Hulu subscribers don't have Prime, as has been speculated, even three percentage points would double Amazon's total.
Of course, one could just as easily turn the argument around and say that downloads during peak hour to be watched later are being counted, so it all evens out. But I do not believe as many downloads take place during peak hour. The most common reason to download, as many have noted, is to have entertainment ready in a "dead zone" where Internet connection is not feasible. On a plane, a road trip, etc. When traveling out of the house, in other words.
The whole reason peak hour is peak hour is that it corresponds to when the most people watch TV. In other words, to the evenings, when everyone has gotten home, settled on the couch, and turned on Netflix. They call it primetime for a reason, after all. Peak hour is primetime, is home time. I would make the smallest of intuitive leaps and guess that not many people are traveling or preparing to travel during peak hour. If they were, it wouldn't be peak hour. So downloads are probably taking place earlier in the day, when people are getting ready to walk out the door.
I am in a way suggesting that downloads could multiply Prime streaming 20-30 fold, which is what it would take to get Prime into Netflix territory. But it could be proportionally significant, which in the context of a growing baseline is especially important. Sandvine's end-year numbers showed Netflix up 60 basis points from its April report. Meanwhile, Amazon was up more than 100 basis points. If that kind of growth is showing up in the peak report, and there's more growth hidden in the downloads, Amazon may be gaining on Netflix a lot faster than we think. And if Amazon continues to grow, it may be hitting one-half when we think it's hitting one-third, or pulling even when we think it's hitting one-half.
Only Amazon knows for sure if this is happening or not, and of course they aren't saying. However, investors would be wise to take Netflix's claim to dominance of streaming video with perhaps a little more salt than in years past. Just as Amazon hides most of its profits by re-investing them into new business lines, it may have found a way to hide its streaming growth as well, while it quietly builds a new empire to rival the streaming king's.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.