Source: Netflix.
It's now seems more likely people have seen the latest Netflix (NFLX -0.48%) original than the latest viral video on YouTube. According to a recent survey from RBC Capital Markets, 51% of Americans have watched Netflix in the past 12 months. That tops YouTube, which saw viewership peak during the 12-month period ending in September of this year at around 50%. These statistics are remarkable because Netflix is a premium service that requires a subscription, whereas YouTube is free.
More importantly, for both Netflix and Alphabet (GOOG 10.11%) (GOOGL 10.43%) investors, both are exhibiting sustained user growth momentum, which will help fend off competition from companies such as Facebook (META 0.35%) and Amazon.com (AMZN 3.71%).
The growing competition
While Netflix and YouTube have seen an increase in viewers over the last year, Amazon and Facebook have reported excellent growth in their own video options. Facebook told investors during its third-quarter earnings call that video views now average 8 billion per day, up from 1 billion just a year earlier. Amazon Prime subscribers, who get access to Prime Video, grew 50% during 2014 despite a 25% increase in price.
But Netflix and YouTube remain market leaders and continue to grow viewership. This trend has enabled Netflix to raise its prices twice in a year and a half, and YouTube just launched a subscription service to remove commercials, among offering other benefits.
The current user base for both video services acts as a moat that protects them from growing competition. Despite the rise in video views on Facebook, for example, YouTube remains the place to upload and find videos. Netflix's growing domestic subscriber base is allowing it to expand rapidly internationally while investing heavily in content.
Still, Facebook and Amazon represent significant threats because they have revenue sources from outside video. YouTube has the support of Google, but other Alphabet companies now keep their finances separate because of the recent restructuring. Netflix, of course, is a pure-play streaming video service with a legacy DVD mailing service.
As such, developing these moats with big viewership and subscriber bases is key to fending off the competition coming from bigger tech companies with their hands in multiple projects.
Password sharing is still a problem for Netflix
An interesting note about the survey is that password sharing still appears to be an issue for Netflix. CEO Reed Hastings has always said password sharing is only a modest concern, but the RBC survey results indicate that around 160 million people are watching Netflix on 43 million accounts. That's nearly four people per account; the average household is only three people.
Unless Netflix households are unusually large, there's a significant number of freeloaders watching Netflix. Those freeloaders represent an opportunity for Netflix for added revenue. One way Netflix has dealt with that matter is by increasing the price of its multistream subscription options. During the last price increase, the single-stream option -- which is naturally harder to share with friends -- remained the same price.
YouTube viewership may be higher
Another note on the survey results is that YouTube viewership could very well be higher than reported. This is a self-reporting survey, which means some people may have seen a YouTube video and not realized it. YouTube videos are embedded all over the Web, and users don't have to consciously seek out YouTube content to find it.
As a result, it's likely YouTube viewership is higher than reported in the survey. The company touts more than 1 billion monthly viewers, and it's locked out of China, so a lot of those viewers are probably coming from America. Since YouTube mostly generates its revenue from ads, having a large American audience is especially valuable. YouTube reportedly generated $4 billion in revenue last year but didn't turn a profit. With the sustained growth in American viewers this year, it may start producing profits for Alphabet investors.
Keeping the audience watching
Both Netflix and YouTube are investing heavily in new content for subscribers, and YouTube is working with creators to make it easier for them to produce their free content. Their huge viewership is key to those investments, and it's what keeps new people coming to both services. This virtuous cycle will lead to sustainable growth for both companies, especially Netflix as it expands abroad. And while the competition is growing, YouTube's business officer, Robert Kyncl, believes there's plenty of space for everyone to grow.
