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Will Apple TV Destroy Netflix?

By Andrés Cardenal – Sep 8, 2015 at 8:00PM

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Apple is venturing into content production, generating big fears among investors in Netflix stock.

Netflix (NFLX 1.82%) stock is under heavy selling pressure lately, falling by more than 20% in the past month alone. Netflix is a remarkably volatile name, and many high-growth companies are being hurt by a weak market environment and economic uncertainty in China. Adding to the concerns, Apple (AAPL -0.23%) is reportedly working on its own exclusive video programming, and this could clearly represent a major competitive threat for Netflix and other players in the business. Will Apple's move into original content creation obliterate Netflix?

Apple goes to Hollywood
According to a report from Variety, Apple "has held preliminary conversations in recent weeks with executives in Hollywood to suss out their interest in spearheading efforts to produce entertainment content." The details are still unclear about the timing of such efforts, or how committed Apple is into this project. However, different news sources have reported over the past several months that Apple is planning to enter the industry in the middle term.

Apple is having its iPhone event on Wednesday, Sept. 9. Most eyes will be focused on the new iPhone models that Apple will probably introduce in the conference. However, there are also strong rumors about the possibility of a revamped Apple TV. 

Based on reports from sources such as Re/Code and Bloomberg Business, Apple was originally planning to introduce a new live TV subscription service with the new Apple TV model. However, the announcement will be postponed toward next year because negotiations with TV networks have stalled.

Apple seems to be clearly interested in adding valuable content to its new Apple TV, and this makes a lot of sense, considering the major role that content plays a source of competitive differentiation in the business. 

Since Apple is tech juggernaut with enormous financial and strategic resources, investors in Netflix stock have strong reasons to pay close attention to Apple's venture into content and what this could mean from a competitive point of view.

Will Apple crush Netflix?
Apple has many big advantages that make it a dreaded competitor for companies in many businesses. To begin with, an enormously valuable brand, a remarkably loyal customer base, and a reputation for quality are crucial strengths when it comes to gaining traction in new businesses. 

In addition, Apple has over $200 billion in cash and liquid investments on its balance sheet, and the business brings in tons of fresh money every quarter. That's a lot of money to buy and produce content. To put the numbers in perspective, Netflix has a total market capitalization in the neighborhood of $42 billion.

Online video is clearly a dynamic and changing industry, so investors in Netflix need to closely watch how the competitive landscape evolves over time. That Apple is making inroads in the industry is not a variable to disregard. However, there's no reason to believe Apple will necessarily hurt Netflix in the coming years.  

Netflix is already a well established leader in streaming, and it has built a solid competitive position based on high-quality exclusive content. The company has over 65 million subscribers as of the end of the second quarter, gaining 3.28 million new members in the past quarter alone. Management is accelerating its international expansion plans in the coming two years, and everything indicates that Netflix is poised to sustain its rapid growth rates over the middle term.

Even if Apple does well in the industry, that doesn't mean Apple's win will necessarily be Netflix's loss. Apple typically competes at the top end of the pricing spectrum in different businesses, and Netflix is competitively priced at only $8.99 a month. 

Just as traditional TV has provided plenty of room for multiple players to succeed over the years, online streaming is just getting started, and there should be more than enough opportunities for Apple, Netflix, and many other players to growth and thrive with their own different business models and pricing strategies.

Netflix operates in a young and evolving industry, and it's important to watch how different companies are playing their cards in the business. However, as long as Netflix keeps doing a sound job of delivering highly demanded content for a conveniently low price, there's no reason to believe Apple will inflict too much damage on the online streaming leader.

Andrés Cardenal owns shares of Apple and Netflix. The Motley Fool owns and recommends Apple 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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