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Could YouTube’s New Subscription Service Affect Netflix?

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Updated

Netflix’s domestic memberships misses estimates

Previously in this series, we discussed Alphabet’s (GOOG) YouTube launching an online subscription-based video service, YouTube Red. We also discussed how media companies are expected to benefit from this service.

In this part of the series, we’ll look at the impact of YouTube’s subscription-based online video service on Netflix (NFLX). Netflix announced its 3Q15 earnings on October 14, 2015. It posted revenues of $1.7 billion in 3Q15, a rise of 23% over its revenue in 3Q14.

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However, the company’s net additions of 0.88 million US members in 3Q15 was disappointing. From eight analysts’ estimates, Bloomberg forecasted an average of 1.3 million net additions in 3Q15. Netflix’s net additions of members in 3Q15 completely missed this estimate. The 0.88 million net US additions also missed the company’s 3Q15 internal estimate of 1.2 million net additions.

However, as the above graph indicates, Netflix had a smaller rise, of only 2%, in its domestic memberships in 3Q15. It was one percentage point lower than the same quarter last year.

How could YouTube’s online video service impact Netflix?

Netflix has stated that lower net additions of US members were due to the introduction of new credit and debit cards by banks. However, there is a strong possibility that Netflix has been unable to attract new subscribers because its competitors, Hulu, CBS (CBS) All Access, and HBO Now (TWX) are offering better content. Furthermore, Hulu is offering different price tiers for its online video subscription service—$7.99 for an ad-supported service and $11.99 for an ad-free one. CBS All Access is cheaper than Netflix at $5.99.

YouTube launching its subscription-based online video service could further threaten Netflix’s dominance in the OTT (over-the-top) market. With YouTube pricing its online video service to match Netflix’s popular standard plan, that is, at $10 per month, better content could determine better service.

You can get exposure to Netflix by investing in the PowerShares QQQ Trust, Series 1 ETF (QQQ), which has 0.8% exposure to the company. The same ETF also holds 12.6% of Apple (AAPL) and 5.2% of Amazon (AMZN).

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