Netflix (NASDAQ:NFLX) fell by 5.2% on Wednesday after investors reacted with fear to the news that Amazon.com (NASDAQ:AMZN) and Time Warner's (NYSE:TWX) HBO will be joining forces in the online streaming competition. Is this an overblown short-term reaction, or will the alliance between Amazon and Time Warner inflict serious damage on Netflix?
Tony Soprano joins the online revolution
Amazon announced on Wednesday that Prime Instant Video will be the exclusive online-only subscription home for select HBO programing. HBO content will become available on Amazon Prime on May 21, and the agreement between Amazon and Time Warner includes widely popular hits such as The Sopranos, Six Feet Under, and Band of Brothers, among many others.
Shows will be available on Amazon Prime Instant Video three years after the original broadcast. That means Game of Thrones is currently not included. Neither are other titles such as Sex and the City and Curb Your Enthusiasm because of previously existing syndication deals that HBO has signed with other outlets.
In addition, HBO Go will now be available on Amazon's new set-top box, Fire TV. Amazon's incoming device in the battle for the living room offers solid specifications for a competitive price, and not including access to HBO Go was one of the biggest disadvantages of Fire TV versus competing set-top boxes before this deal with Time Warner. Now that Amazon and HBO are on the same side in the streaming business, Fire TV is overcoming a major drawback.
Amazon and Time Warner did not disclose the length of the agreement or its financial terms, but Amazon is clearly adding valuable content to its library, and this is a major factor in the competition for streaming.
As for Time Warner's HBO, this is the first time the company has gotten involved in an online streaming deal, so the financial compensation must be convenient enough if the company has decided to finally enter a licensing agreement with an online-only streaming partner.
Is Netflix in trouble?
Amazon and Time Warner's HBO are clearly two of the biggest competitive threats that Netflix is facing. In fact, in its latest letter to to shareholders, management proudly quotes a survey saying that viewers rate Neflix as the second best original programing outlet, second only to HBO.
Changes in the competitive landscape are always worth watching, especially in such a dynamic growth industry like online streaming, so investors need to monitor the alliance between Amazon and Time Warner and its possible impact on Netflix.
On the other hand, it's worth noting that there is no reason to believe that online streaming will necessarily be a zero-sum game in which a single winner takes all the profits and all the other companies are left with empty hands.
Just like the traditional TV business, online streaming could easily provide enough room for Netflix, Amazon, and other players to succeed and grow in the long term.
From Netflix's letter to shareholders: "Since much of the content on Netflix and Amazon Prime -- as well as Hulu in the U.S. -- is mutually exclusive, many consumers see value in subscribing to all three networks."
Netflix is growing at full speed on the back of the competitive differentiation provided by high-quality original content. The company added 4 million members in the first quarter of 2014 for a total of 48 million subscribers, including both the U.S. and international markets.
This is not only an impressive growth rate on a standalone basis, but even an acceleration in growth versus the 3.05 million new members the company gained in the first quarter of 2013.
Netflix is thriving over the past several years in spite of growing competition from Amazon, Time Warner's HBO, Hulu, and others. The online streaming business is gaining share versus traditional video at an impressive speed, and it still has a lot of room for growth on a global basis.
As long as Netflix continues doing a sound job at providing desirable exclusive content for a convenient price, growing competitive pressure is no reason to stay away from the company.
Increased competitive pressure is always a risk to watch, especially when coming from powerful players such as Amazon and Time Warner's HBO. However, the online video industry provides enormous room for growth in the years ahead, and Netflix is moving in the right direction when it comes to competitive differentiation and subscriber growth. The online streaming leader is no house of cards.
Andrés Cardenal owns shares of Amazon.com, Apple, Google (C shares), and Netflix. The Motley Fool recommends and owns shares of Amazon.com, Apple, Google (A and C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.