While news that YouTube is now available on 53% of set-up boxes may have Alphabet Inc (NASDAQ:GOOGL) fans excited, Netflix, Inc. (NASDAQ:NFLX) doesn’t seem fazed by it. You can see it in the price action: since the data points hit the market early Monday morning, NFLX stock is up 0.9% while GOOGL is down 0.2%.
Just about every firm on Wall Street covers both of these companies with microscopic precision, so if these numbers budged the competitive map, we would have seen a bigger reaction.
That said, the logic behind Wall Street’s yawn does tell us important things about how post-cable TV is evolving.
For one, a network-driven alternative to what’s on cable has grown beyond niche to normal, with 53% of U.S. households now pushing network video straight to their screen. That’s a great inflection point in terms of market penetration: big enough to qualify as a lot more than a fad but with almost enough room left to double its audience one more time.
TV is big business, limited only by the amount of time we spend viewing it. With 96% of the population still watching the conventional cable box, companies selling alternative programming can capture plenty of viewer minutes and starve their rivals. NFLX reaches 75% of the streaming audience, so 56% of the overall TV audience remains wide open to expansion.
I suspect the company will keep nibbling at that market or even discount the service to take bigger bites if management decides scale is more important than profitability. Either way, every one of those viewers pays NFLX the same monthly fee no matter how many hours they stream – even if they don’t use the service at all.
NFLX Subscribers Want to Pay
The YouTube model is very different. Simply being available on the big household screen doesn’t automatically generate a lot of free cash flow and it doesn’t really compete with NFLX or other pay-TV channels. YouTube original programming — the “Red” Lineup of shows — hasn’t exactly made a big impact at $9.99 a month.
Beyond that thin slice, the site’s content is still overwhelmingly user-generated and available for free. GOOGL gets ad revenue when those videos play via set-top boxes, but NFLX signs subscribers who want to pay.
Almost every one of those 58 million NFLX households pays. Only 1.5 million of the 34 million YouTube households have upgraded to Red. The rest may drain a few minutes from Netflix and rack up a little ad revenue, but a show more or less isn’t really going to change the dynamics much at all.
As it is, NFLX is chewing up about an hour a day of a subscriber’s viewing time, locking those blocks off from competitors who need the eyeballs.
The Real Competitors
I believe the real competitors here are Amazon.com, Inc. (NASDAQ:AMZN) and other monthly subscription models like Sling and Hulu, not to mention traditional TV like Time Warner Cable Inc’s (NYSE:TWC) HBO.
AMZN is coming up fast, and it’s easy to imagine scenarios where subscribers looking to trim their budgets will have to choose one service or the other. I don’t think that’s happening yet — Amazon Prime plus NFLX streaming is $19 a month compared to an average cable TV bill above $100, so cable cutters can keep both options open, watch all day and it’s the cable companies that suffer.
This is perhaps another golden age of television — or maybe we call it video. People will chase whatever they like at price points they can afford.
Right now, the “free” option YouTube supports hasn’t cut all that deeply into pay-for-play, which means NFLX stock is a long way from feeling any heat.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
