For years, Netflix (NFLX -0.63%) dazzled both its audiences and investors, but more recently it's become fashionable to trash the streaming pioneer.

Social media is filled with complaints about Netflix's content or posts from those who have canceled the service in favor of another streaming option. Wall Street largely bought into this narrative, especially after Netflix lost subscribers in the first two quarters of 2022, and the stock had lost more than 75% of its value at one point this year.

However, things are looking up for the company after it delivered better-than-expected subscriber growth in the third quarter. It added 2.4 million new members, and called for subscriber additions to accelerate in the fourth quarter, forecasting 4.5 million additions.

In the letter to shareholders, which has historically been written by co-CEO Reed Hastings, the company took a moment to remind investors that Netflix is still head and shoulders above the competition, despite criticism that the streaming industry has become commoditized. 

What Hastings said

It's rare for the Netflix co-founder to take a shot at competitors. In the past, he's often dismissed the competitive threat, saying the market is so big that there's plenty of opportunity. He's even complimented content from peers like Disney+ and HBO Max. In the letter, he said:

Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard -- we estimate they are all losing money, with combined 2022 operating losses well over $10 billion, vs. Netflix's $5 to $6 billion annual operating profit.

He is essentially telling investors not to be fooled by the influx of new competition, and he has a point. Netflix has been around for more than 20 years, and while it existed as primarily a DVD-by-mail company for the first part of its history, it's offered streaming for 15 years. It's also taken years of investing in the business and building up a subscriber base of more than 200 million for the company to become profitable.

Hastings predicted the next evolution in the streaming industry, saying: "While it's early days, we're starting to see this increased profit focus -- with some raising prices for their streaming services, some reigning in content spending, and some retrenching around traditional operating models which may dilute their direct-to-consumer offering."

Most of Netflix's competitors aren't pure-play video streamers, so it's difficult to make apples-to-apples comparisons, but there's not much evidence that any of the nascent streaming businesses are profitable. Disney reported a $2.5 billion operating loss in its direct-to-consumer segment, which includes Disney+, Hulu, and ESPN+, in the first three quarters of its current fiscal year.

Amazon essentially gives away video streaming as a way to attract and retain Prime members. Apple uses Apple TV+ in a similar manner, to enhance customer loyalty to its devices -- it charges just $4.99/month for its streaming service. Warner Bros. Discovery, the newly formed parent of HBO Max and Discovery+, also reported a $512 million adjusted EBITDA loss in direct-to-consumer its most recent quarter.

Taking those numbers into account, Hastings' estimate of $10 billion or more in operating losses among its rivals seems reasonable. From a financial perspective, the battle of streaming debutantes vying to be the next Netflix has produced nothing more than a giant money pit.

Why it matters

Netflix disrupted the traditional television and movie industry, and some may believe that the disruptor is now being disrupted. That's not what's happening here, though.

Netflix's streaming challengers aren't bringing anything new to the industry, conceptually. They're just bringing new content. With the entrance of Disney+, HBO Max, and the others, the industry has gotten more competitive, but Netflix still has the upper hand. It has the biggest library, biggest content budget, largest subscriber base, and most experience.

Legacy media companies like Disney, Paramount Global, and Warner Bros. Discovery got into streaming not because they wanted to, but because they had to do so. As Hastings predicted several years ago, linear TV is gradually dying, being replaced with streaming, which is why the legacy media companies are willing to lose billions a year on streaming. They have no choice. Their core businesses are going away.

That doesn't mean Netflix can ignore the competition, but Hastings understands that reality. Here's how he summarized the current state of the industry on the earnings call:

A lot of us [are] battling it out for, do we have the best content in the world? Do we have the best suggestions in the world? The lowest prices? All the classic competitive dynamics. So we're pretty excited about this next phase, which is competitive excellence. And it's straight-ahead execution. If we can just be better than everybody else, and we're pretty driven at that.

Netflix still has to execute, but it's in a much better position to do that than its money-losing rivals. As the company shifts to a new phase -- building out its advertising business and operating in a more competitive environment -- it's worth remembering that the company still has some key advantages.