Analyzing the must-know business trends affecting Netflix (Part 11 of 11)

(Continued from Part 10)

Netflix is influencing a shift in the entertainment world

Netflix (NFLX) has long been considered a threat to cable distribution companies, as people’s interests have started to shift from watching TV through traditional means to online devices. This shift has been influenced by a number of factors, such as program schedule flexibility, convenience, ability to skip commercials, the ability to watch multiple episodes sequentially, and the lower cost compared to cable and pay-TV services. No wonder we saw considerable subscriber loss at Comcast (CMCSA) and Time Warner Cable (TWC) last year.

Not only cable companies, but also content owners such as Walt Disney (DIS) and Time Warner (TWX), have been facing subscription losses for select TV channels over the last few years. The main reason why consumers are selecting fewer TV channels is because of the high subscription cost they have to pay for complete packages. By avoiding costly channels such as ESPN and TNT, consumers can save money.

According to a survey of more than 24,000 U.S. adults conducted by Experian, households with a Netflix or Hulu subscription were three times more likely not to have a cable subscription than the average household in 2013. As the chart below shows, the percentage of cord-cutters that had Netflix or Hulu subscriptions increased from 13% in 2010 to 18% in 2013. This shows that the “cord-cutting” threat to cable and media companies is real.

Competitive threats are increasing for Netflix

Although the broad shift towards online TV streaming is beneficial for Netflix, competitive challenges to the company have increased over the last few years. Media companies such as Time Warner and CBS (CBS) have increasingly made their content available online for consumers who don’t subscribe to pay-TV service. Amazon (AMZN) has also started to aggressively acquire more quality content to compete with Netflix and at the same time popularize its Prime member service.

Subscriber growth at Netflix has slowed down. Netflix didn’t meet analysts’ expectations for net subscriber additions in 3Q14. As a result, its stock suffered from a decline of more than 25%. Although Netflix continues to expand into a number of countries in the international market, the high initial investment involved with each country means Netflix is far from breaking even in international markets. So Netflix is facing a double whammy of slower subscriber growth and declining margins.

Browse this series on Market Realist:

• Part 1 – Must-know: Why Netflix stock fell so steeply
• Part 2 – Why Netflix doesn’t consider HBO’s streaming service a threat
• Part 3 – Will media companies moving online affect cable companies?