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Why market fears about Netflix are overblown

September 3, 2015

Netflix Inc. Illustrations Ahead Of Earnings FiguresNetflix Inc. Illustrations Ahead Of Earnings Figures
NetflixPhotograph by Andrew Harrer — Bloomberg/Getty Images

After rising most of this year, Netflix’s stock has become the pinada of Wall Street, getting whacked even during an uptick. On Wednesday, Netflix (NFLX) shares were down 0.33% at closing, while the Dow was up almost 300 points, or 1.8%. A flurry of seemingly bad news has hit the stock hard, but the market’s pessimism about the video streaming company may not be justified. Here’s five reasons why:

Hulu is not exactly a competitor
Hulu, a joint venture between various television networks, is now offering an ad-free subscription service for $11.99 a month. This may seem like a blow to Netflix, but it’s actually the opposite. At $11.99 a month, Hulu’s subscription is offering the same basic service as Netflix at a 50% higher price. That doesn’t sound like a good deal for consumers. Hulu will still offer a subscription with ads for $7.99 a month, but that will come with annoying ads.

In addition, Hulu’s advantage over Netflix is that it offers current television programming that its rival doesn’t have available until months later. That makes it more of a complementary service to Netflix than a direct competitor. In terms of subscribers, Netflix easily beats Hulu with 42 million U.S. subscribers versus 9 million subscribers; and while both provide original content, Hulu’s offerings are nowhere near as popular as Netflix’s original shows, such as Orange is the New Black and Marvel’s Daredevil.

More: Here’s why Netflix stock is down 13% this week

Apple is not a threat, at least when it comes to original content
Apple (AAPL) has reportedly been talking to Hollywood about producing original content of its own. With more than $200 billion in cash on its balance sheet, the tech giant could be a formidable competitor to Netflix. But while that theory sounds plausible, it’s actually specious.

First, if Apple creates original content without its own subscription-based streaming platform to deliver it, it would probably have to license it to companies like Netflix or Hulu anyway in order to maximize profits. It’s hard to see many consumers buying multiple episodes of a series on a pay-per-view basis on iTunes – it would simply be too pricey. Movies might work, but that will hardly be a Netflix killer.

Second, if Apple does launch a video streaming business, it would likely have to struggle with the type of challenges that it has encountered with its troubled music streaming service, Apple Music. Converting the customer base for Apple products into subscribers for a new filmed entertainment streaming service is going to be difficult and expensive, and subscriber acquisition can take a long time. Netflix really doesn’t have much to worry about here.

So what if you can download movies on Amazon Prime
Amazon (AMZN) surprised many when it announced earlier this week that it would offer its Prime users the ability to download video content on iOS and Android devices for offline play. That means you can take your favorite movies or television shows with you on a plane, in a car, on the beach or wherever the wireless coverage is poor and doesn’t facilitate streaming.

It’s a good move, but hardly a game changer. It’s unclear how much memory would be required and in an era of often free Wi-Fi, downloading isn’t quite as compelling as it might have been a decade ago. Also, while Netflix has historically refused to offer this option, it could always reverse that policy and eliminate this differentiator.

More: Why Amazon Prime is now better than Netflix

Epix was not that big of a loss, anyway
The stock market reacted badly to the revelation that Netflix won’t renew its deal with Epix for its library of content after it expires this month. Epix’s library includes hit titles like the Hunger Games movies and Transformers: Age of Extinction, but once again, market fears seem to be outpacing reality. Even though Netflix will lose some popular titles, its current deal with Epix is non-exclusive, which greatly reduces the value of those titles. Not to mention that some other titles are old and not necessarily a big draw for Netflix subscribers anyway.

Besides, Netflix does original content best. In order to pay for ramping up its production activities and expanding its business across the globe, the company may want to cut some costs on the acquisition side anyway. So the Epix decision could wind up benefiting Netflix by freeing up resources the company can use to pursue its core growth strategy even more aggressively.

Ecommerce giant Alibaba (BABA) is launching a streaming video service in China modeled after Netflix. Netflix’s own entry into China is likely to be a slow, gradual process instead of the splashy affair seen in other markets. That’s smart given the inherent difficulties of cracking the Chinese market, including customer habits and regulatory hurdles, and Netflix could potentially learn from Alibaba’s experience (and mistakes) before increasing its own commitment there.

More importantly, a weak Chinese economy likely makes this a bad time for entry to begin with, which makes Netflix’s wait and see approach even more prudent. By the time Netflix joins the fray, it may also be able to benefit from some type of recovery in China.

S. Kumar is a tech and business commentator. He has worked in technology, media and telecom investment banking. He does not own any shares of the companies mentioned in this article.