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Don't Be Fooled: Hulu and Amazon Aren't a Threat to Netflix

By Adam Levine-Weinberg - May 4, 2016 at 12:50PM

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Netflix's clear focus on ad-free on-demand streaming TV is a huge competitive advantage.

In the past five years, Netflix (NFLX 2.90%) has established itself as the No. 1 streaming video service in the U.S. -- and around the world. In the domestic market, (AMZN 3.15%) and Hulu are its biggest competitors.

Netflix has a big lead in the U.S. streaming market. Image source: The Motley Fool.

Amazon and Hulu are both tweaking their business models to draw in more streaming video subscribers. However, their efforts aren't likely to put a dent in Netflix's leadership position.

Amazon creates a stand-alone video option
Five years ago, launched Prime Instant Video as an additional benefit for its Prime subscribers. Since then, it has rapidly grown its streaming video catalog and used it to sign up more people for Prime.

Indeed, streaming video has been just one of many ancillary services that Amazon has added to the Prime program above and beyond the core free shipping benefit. This has been good for the company, because Prime members tend to spend a lot more money on than non-members. At the same time, subscribers get a ton of value from their Prime subscriptions.

Nevertheless, many pundits have argued that Amazon should offer Prime Instant Video as a stand-alone Netflix rival to target people who aren't interested in the other Prime benefits. Last month, Amazon did just this. Customers can now subscribe to Prime Instant Video for $8.99/month: $1 cheaper than Netflix's most popular plan.

Hulu moves into live TV
Meanwhile, Hulu appears to be wading into the streaming live TV market, joining Dish Network's Sling TV service and Sony's PlayStation Vue. Hulu hopes to launch a streaming "skinny bundle" of live TV channels by early 2017, according to The Wall Street Journal.

This would continue a trend at Hulu to tack on other offerings beyond its bread-and-butter streaming video-on-demand service. For example, last summer, Hulu began selling streaming access to the Showtime premium network as an add-on.

Netflix doesn't mind
It's possible that these new offerings from Amazon and Hulu will be successful on their own terms. Regardless, they have little chance of disrupting Netflix's success.

Amazon's stand-alone Prime Instant Video has a very limited target market: people who don't want to commit to a full year or are too strapped for cash to pay up front. That's because the video-only subscription actually costs more than the full Prime subscription over the course of a year ($107.88 compared to $99)!

Meanwhile, Hulu's live TV service isn't likely to offer much more than the streaming live TV services already available. It will mainly compete with Sling TV and PlayStation Vue as well as traditional cable and satellite TV. Netflix has always positioned itself as a complement to cable TV, not just as a substitute.

Netflix's content differentiates it from other streaming video services. Image source: The Motley Fool.

More broadly, Netflix believes that multiple streaming video platforms will succeed, as all TV will move to the Internet over time. Since different services offer different content, Netflix expects many people to subscribe to more than one.

Simplicity is the key to Netflix's success
Finally, Netflix's clear focus is a huge advantage over Amazon and Hulu in the streaming video market. Consumers know what Netflix stands for: commercial-free on-demand streaming for movies and TV series.

By contrast, Prime Instant Video is just a small piece of what Amazon does. Moreover, since Amazon also sells pay-per-view content, it's not always easy to figure out what content is included with Prime, especially in Amazon's TV apps.

As for Hulu, it has an everwidening array of options: a limited menu of free ad-supported content, a subscription service that offers more content but still includes ads, and a pricier ad-free subscription service. Live TV would be just one more complication making it difficult for consumers to understand what Hulu stands for.

Netflix's comparative simplicity -- it offers three tiers differentiated by video quality and how many people can watch at once -- has helped it build a much stronger brand in streaming video.

As a result, Netflix is on pace to add about 5 million domestic subscribers this year, despite entering the year with nearly 45 million U.S. subscribers. Market saturation is certainly becoming an impediment to faster growth for Netflix's domestic business. Competition from Amazon and Hulu is a much smaller concern.

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