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Netflix vs HBO: Is the Rivalry as Intense as it Seems?

By John Casteele – Feb 24, 2014 at 11:46AM

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Netflix has long identified HBO as one of its biggest competitors for content, and "Netflix vs. HBO" comparisons are fairly common. Is the rivalry between the two companies as big as it's made out to be, though?

When you think of competitors to Netflix (NFLX -0.07%), the first things that might come to mind are Amazon.com's (AMZN -1.63%) Instant Video service and other video streaming services like Hulu. If you were to ask Netflix CEO Reed Hastings about the company's competition, however, he might give you a different answer. Last June, Time Warner's (TWX) HBO was singled out as Netflix's "biggest, long-term competitor for content" in an investor relations document on the company's long-term view of its business.

What this means is that HBO presents a threat not only to Netflix in regard to where viewers are getting their entertainment, but also to the content that Netflix is able to offer. The cable network can secure exclusive contracts that limit the content that Netflix can stream, it can develop shows such as "Game of Thrones" that draw in viewers, and it can even bid against Netflix for original content. At one point, there was a chance that Netflix's Emmy and Golden Globe-winning "House of Cards" could have aired on HBO instead.

How fierce is the competition?
In the ongoing battle between Netflix and HBO, HBO has the advantage of having a brand with a 40-year history and being one of the biggest draws in premium cable. While Netflix has definite momentum behind it and has garnered acclaim for exclusives such as "House of Cards" and the Oscar-nominated documentary The Square, HBO has been producing high-quality originals for decades. Despite Netflix's advances, it still has a way to go if it plans to overtake HBO.

While there have been a few reports in the last year of Netflix making significant headway, these have come with caveats or were soon subject to corrections. A claim that Netflix had surpassed HBO in subscribers was eventually clarified to point out that it only covered subscribers in the United States; worldwide, HBO still has a solid lead on Netflix. Likewise, a recent claim that Netflix was gaining subscribers while HBO was losing them was corrected to show that the actual loss was occurring with the number of households subscribing to premium channels, but that those who subscribe are subscribing to more channels than before.

There is definitely competition between the two in regard to original content, but that competition might not be as heated as it's sometimes made out to be. Furthermore, Netflix seems much more interested in touting the intensity of the competition than HBO is.

What about Amazon?
It's important to remember that even Netflix identifies HBO as a "competitor for content," which is a bit different than being a competitor for subscribers. While some viewers may choose HBO and HBO Go as an entertainment option instead of Netflix, the differences between the cable channel and the streaming service are significant enough that many would opt to simply have both. When it comes to competition for subscribers, Amazon is a much bigger competitor than HBO.

Amazon competes with Netflix for content as well, though this is more for third-party content than original series. Examples of this would be Amazon signing a contract with Viacom (NASDAQ: VIA) for its shows when the Viacom/Netflix contract expired, or Amazon's recent acquisition of all three seasons of "Veronica Mars" in advance of the launch of the Veronica Mars feature film. Given how important original content is to the identity that Netflix is building for itself, though, it's easy to understand why it plays up its rivalry with HBO more than the competition it receives from Amazon Instant Video.

The HBO model
If there isn't a huge heated back-and-forth competition between HBO and Netflix, why does the streaming service act like there is? The answer is likely that it is trying to keep pressure on HBO because the cable channel serves as the best example of what Netflix wants to become. With plans to spend over $3 billion on content this year and over $6.2 billion in the next 36 months, the company wants to cement itself as the streaming destination for HBO-like high-quality originals and third-party content that viewers want to see.

The pressure that Netflix puts on HBO not only serves to remind viewers that the company holds itself up to HBO standards, but also to keep Netflix itself on track. Even if the rivalry between Netflix and HBO is a little one-sided at the moment, the drive for greater quality and increased acquisitions that it creates will only serve to improve the service in the long run.

John Casteele has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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