The average U.S. streaming video subscriber has three subscriptions. Netflix (NASDAQ:NFLX) is likely at the top of the list for many, considering it leads the market with some 57 million subscribers. There's also Hulu and its 20 million subscribers. Amazon's (NASDAQ:AMZN) Prime has 100 million members worldwide, and about 26 million U.S. members stream Prime Instant Video, according to Reuters.
But the number of up-and-coming services for subscription video on demand (SVOD) is growing. There's the legacy premium cable channels: HBO Now, owned by AT&T, has around 5 million subscribers; CBS's Showtime has about 2.5 million; Lionsgate's Starz has 3 million. CBS also has around 2.5 million subscribers to CBS All Access. There's also dozens of genre-specific SVOD services, including Crunchyroll for anime and Disney's (NYSE:DIS) ESPN+ for live sports and commentary, both of which have over 1 million subscribers.
Meanwhile, a number of traditional media companies are also considering launching more direct-to-consumer services, and big tech companies are investing heavily in video as well. With the rapid growth in the number of video-on-demand services in the market, Netflix and Amazon investors might be getting a bit worried.
First, the good news for investors in streaming leaders
As mentioned, the average American subscribes to three different services, according to a survey from Juniper Research. As much as Netflix, Amazon, and Hulu try to offer everything a consumer might need in terms of video entertainment, they'll inevitably fall short of consumers' demands. In all likelihood, most subscribers use one or two main SVOD services and might supplement them with one or two more to round out their entertainment.
And the same trend pushing media companies like Disney to offer direct-to-consumer streaming video will bolster the entire industry. As more people cut the cord, they'll have a bigger budget for streaming video subscriptions. It's more likely that competition eats away at cable and satellite subscription revenue than it does at Netflix or Hulu revenue.
Then there are specific competitive advantages for some of the streaming leaders. Netflix and Hulu, for example, have access to incomparable content libraries. Netflix has built a lineup of original series that more consumers prefer than HBO's critically acclaimed series. Hulu also has had success with its originals, but its exclusive access to next-day streaming rights for popular shows produced by its parent companies gives it a significant competitive advantage.
Amazon, meanwhile, packages Prime Instant Video into part of its Prime memberships, which include unlimited two-day shipping on Amazon.com orders, streaming music, free e-books, and more. While management points out that customers who stream video prove more valuable to Amazon over time, it's not necessarily the only thing driving Prime membership growth.
Now, the bad news
A growing number of streaming options could still hurt Netflix's and Amazon's ability to grow revenue. That's because most competitors are willing to undercut Netflix. Disney CEO Bob Iger has already announced his intention to price the forthcoming Disney-branded streaming service below Netflix.
But as more and more streaming options enter the market, consumers might choose less-expensive ones. Another price increase from either Netflix or Amazon could push consumers to explore more of their options, increasing subscriber churn.
In fact, Juniper's survey suggests Amazon is already feeling the effects of an increased number of competitors in the market following its price increase. It saw a -2.9% net customer acquisition rate in subscribers in the U.S. and U.K. as more subscribers left than joined recently. HBO Now, which is priced much higher than other SVOD services at $15 per month, saw a significantly higher churn rate. Netflix was the only service in the survey with a positive adoption rate.
That's not to say price increases for either Netflix or Amazon won't be worth it. Netflix saw an increase in subscriber churn a couple of years ago when it raised prices on some customers by $2 per month. Over time, the move has paid off with excellent revenue growth despite some struggles growing subscribers. Amazon, meanwhile, could generate an additional $1 billion per year from its higher Prime pricing, despite some unhappy customers leaving.
While Netflix and Amazon might face additional competitive pressure to keep prices low, their management has shown excellent decision-making in the past when it comes to balancing subscriber and revenue growth. What's more, there appears to still be room for competition in the growing market.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Lions Gate Entertainment Class A, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.