Does Netflix have a competitive advantage?

Here's some key evidence that it does.

netflix shares represented by an array of different netflix tv show ads

Image source: Netflix

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Netflix Inc (NASDAQ: NFLX) shares touched an all-time high on Wednesday after the company delivered another impressive earnings report. It added 8.5 million subscribers in the period and said it would no longer need to take on debt.

Despite record subscriber growth in 2020, which was aided by the coronavirus pandemic, Netflix bears continue to roar about the onslaught of competition the streamer is facing.

Over the last year or so, Disney+, Apple TV+, Peacock, HBOMax, and Discovery+ have all joined the streaming fray, and ViacomCBS's Paramount+ is set to launch in March. 

Streaming clearly reached a tipping point last year and the coronavirus pandemic has only accelerated the transition from linear TV to streaming TV that co-CEO Reed Hastings predicted several years ago. For Netflix, the question of whether the company has a sustainable competitive advantage with all the new competition entering the streaming arena bears asking, but after the latest report, there are a number of clear signs that Netflix does have an economic moat. Even better, it is widening.

Pricing power

Netflix said it would raise prices in the US in the fourth quarter, from $13 a month to $14 a month for its standard subscription. With that move, Netflix is now significantly more expensive than all of its competitors except HBOMax.

Service Owner Standard Price
Netflix Netflix Inc  $14/month
HBOMax AT&T Inc (NYSE: T) $15/month
Disney+ Walt Disney Co (NYSE: DIS) $8/month
Hulu Disney $5.99/month with ads, $11.99/month without
ESPN+ Disney $5.99/month
Amazon Prime Inc (NASDAQ: AMZN) $119/year with Prime
Peacock Comcast Corporation (NASDAQ: CMCSA) Several tiers ranging from free to $10/month
Discovery+ Discovery Communications Inc (NASDAQ: DISCA) $4.99/month with ads, $6.99/month without
Paramout+ Viacom CBS Corporation (NASDAQ: VIAC) Pricing yet to be announced
Apple TV+ Apple Inc (NASDAQ: AAPL) $4.99/month

Data source: Company websites. Table: Author's own.

As you can see, most competing services are just about half the price of Netflix, and the only one in Netflix's range is HBOMax, though ad-free Hulu comes close. That's because, like Netflix, HBOMax has also earned pricing power as HBO has built a powerful brand in premium television over the last 40 years, and the network regularly brings home the most Emmy awards among networks. Netflix has managed to do something similar over its shorter history as its aggressive content spending strategy and efforts to offer something for everyone has paid off. 

Asked about pricing power in the recent earnings call, COO Greg Peters said, "We do think we're an incredible entertainment value, and we want to remain incredible entertainment value." He also explained how the company thinks about price hikes, saying: "OK, we've added more value in the service. Now it's the right time to go back to those members and ask them to pay a little bit more so that we can reinvest it and keep adding it."

Netflix prices its service to optimize its content spend, and that strategy and the quality of its content has allowed it to charge more than its peers, giving it a competitive advantage. It's worth noting also that Netflix as the streaming pioneer has a much larger subscriber base than any of its rivals, giving it another advantage as it can allocate its content spend across more members.

Increasing profitability

Cash burn has long been a problem for Netflix, but the company just told investors that it was very close to being sustainably free cash flow positive, forecasting break-even free cash flow for 2021.

Though cash flow has long been a challenge for the company as the nature of its business demands high upfront costs, on a generally accepted accounting principles (GAAP) basis, Netflix's profitability has significantly expanded in recent years. The company posted an operating margin of 18% in 2020 and expects to deliver a 20% operating margin this year. From there, it gets better as management projects an improvement of three percentage points each year going forward, giving the company a margin of 29% by 2024.

That along with its pricing power also indicates an economic moat in streaming. The debutantes are still trying to figure out a way to build out audience and generate a profit. Netflix, with the help of a long first-mover advantage, has been there for a while, and is pressing its foot on the gas pedal at will.

In addition to those strengths, the company's local content focus and global strategy also separates it from the streaming wannabes as it already has a large library of original foreign language content that drives international growth.

Video entertainment is a huge industry and it won't be monopolized. There's room for more than one winner in streaming, especially as the cable ecosystem continues to weaken, but Netflix remains the leader, setting the pace in the industry. Its competitive advantages are clear.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Jeremy Bowman owns shares of Amazon, Netflix, and Walt Disney. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Comcast and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Up nearly 80% this year, does Nvidia stock have room for more?

Nvidia's stock added a lot of its gains the day after Q4 earnings.

Read more »

Piggy bank on an electric charger.
International Stock News

If you'd invested $1,000 in Tesla stock 5 years ago, here's how much you'd have today

Tesla bears may not have noticed it, but Tesla profits are forecast to 3x over the next five years.

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
International Stock News

Bull vs. bear: Can the S&P 500 keep rising in 2024?

We review the bull and bear case for the S&P 500 this year.

Read more »

woman with coffee on phone with Tesla
International Stock News

Why Tesla stock put pedal to metal today

Tesla's robotaxi is coming in August.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

If you invested $10,000 in Nvidia stock the day ChatGPT came out, this is how much you'd have today

Buying Nvidia when the disruptive AI chatbot launched would have been a smart move.

Read more »

A Tesla car driving along a road at sunset
International Stock News

Why Tesla stock was climbing today

Investors were encouraged by news of a price hike on the Model Y.

Read more »

Plate with coloured wedges being parcelled out like a slice of pie representing a share split
International Stock News

Stock-split watch: Is Nvidia next?

Nvidia last split its stock when it traded for a pre-split $744 in 2021.

Read more »

A woman in jeans and a casual jumper leans on her car and looks seriously at her mobile phone while her vehicle is charged at an electic vehicle recharging station.
International Stock News

1 Wall Street analyst thinks Tesla stock is going to $125. Is it a sell?

Tesla is no longer a magnificent stock, according to a Wells Fargo analyst.

Read more »