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Netflix Doesn't Need a Price Cut to Compete

By Adam Levy - Oct 4, 2019 at 10:00AM

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One analyst thinks new competitors will force it to drop its price. She's wrong.

Netflix (NFLX -1.52%) lost U.S. subscribers for the first time in about eight years during the second quarter, and one analyst thinks it could get much worse. With the impending launches of new streaming services from Apple (AAPL 0.03%), Disney (DIS -0.90%), AT&T's (T 0.56%) WarnerMedia, and Comcast's (CMCSA -1.11%) NBCUniversal, Needham analyst Laura Martin believes Netflix's domestic subscriber count could fall by 5 million to 10 million users in 2020.

That is, unless the streaming leader offers a cheaper service. Apple TV+ will cost just $4.99 a month at launch and Disney+ will cost just $6.99. Netflix's service starts at $8.99 per month, and its most popular plan costs $12.99. Martin suggests it could compete with a $6 per month ad-supported service -- the same pricing as Disney's Hulu.

Lower pricing from new competitors shouldn't have nearly as big an impact on Netflix as Martin suggests. Here's why.

A family watching Netflix in the living room.

Image source: Netflix

Complements, not replacements

The idea that current subscribers will substitute Disney+ or Apple TV+ for Netflix is far-fetched. It has an unparalleled catalog of content. While Disney and Apple will offer access to some top-tier content as well, it's hard to imagine millions of subscribers dropping everything Netflix offers to save a few bucks each month.

Just the opposite: Consumers are more likely to justify holding on to their subscription because Disney+ and Apple TV+ are so inexpensive. They're more likely to find room in their budgets elsewhere instead of dropping Netflix.

One such case of shifting budgets is cord-cutting. An increase in affordable streaming options may accelerate the cord-cutting trend, which would actually benefit the company. The streaming leader is seen as the centerpiece to most cord-cutting strategies.

A stronger brand than the competition

Its brand strength gives it more pricing power than competitors. Disney and Apple certainly have strong brands themselves, but not necessarily in streaming video to the home. When you think of Netflix, you only think of one thing. When you think of Disney, you might think of comic book films, animated classics, theme parks, or any number of other things in Disney's business. When you think of Apple, you might think of the tech giant's devices, but not streaming video.

A more comparable brand is HBO, which charges $15 per month, partly because it's built a brand strong enough to support that price.

Netflix's brand is built on its original series and films. And with a rapidly growing content budget, that brand will only get stronger over time, attracting consumers.

Partnerships aren't going anywhere

Netflix has struck several partnerships over the last few years, which are a key part of its continued subscriber growth. This is where its brand strength is crucial. Businesses will only partner with Netflix to distribute its service if its brand is strong enough to bring more customers through the door.

It already has a partnership with T-Mobile, which offers a heavily subsidized Netflix subscription to customers on unlimited plans with two or more lines. T-Mobile may be getting a lot bigger in the near future if its merger with Sprint closes.

Meanwhile, Netflix has a partnership with Comcast to support the service on its X-1 set-top box platform and to distribute Netflix as part of a bundle of networks. It may partner with other distributors in the same way.

Such partnerships increase switching costs for customers of both Netflix and the partner. That's another reason Netflix's partners like them. As such, the subscribers it attracts through partnerships are less likely to switch services and have a higher lifetime value.

Welcoming the competition

CEO Reed Hastings isn't afraid of the competition. He believes as long as Netflix remains focused on what it does well -- building a strong brand and a portfolio of bingeable content -- it should survive the competition.

As mentioned, it doesn't have to lose in order for the competition to succeed. Nobody believes that more than Hastings, who subscribes to HBO and says he'll subscribe to Disney+ when it is launched. And that's not just to keep tabs on the competition -- it's because there have never been more quality options for consumers. Still, Netflix will sit at the top of the list for most.

Adam Levy owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends Comcast and T-Mobile US. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
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Apple Inc. Stock Quote
Apple Inc.
AAPL
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AT&T Inc. Stock Quote
AT&T Inc.
T
$18.10 (0.56%) $0.10
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$108.13 (-0.90%) $0.98
Comcast Corporation Stock Quote
Comcast Corporation
CMCSA
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