Google’s (NASDAQ:GOOG) video sharing site YouTube is giving Netflix (NASDAQ:NFLX) investors a scare with its recent announcement that it has doubled its movie title count to 6,000, on top of an already large number of free and paid titles.^[1] This raises the question as to whether the strategy will be successful and directly compete with Netflix? At the same time, Netflix is juggling competitive threats from Apple’s (NASDAQ:AAPL) iTunes, Hulu and video on demand (VoD) services from pay-TV providers like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC).

YouTube Has a Wider Reach

Compared to Netflix’s approximate 23.6 million subscribers, YouTube’s user count of close to 500 million points to a vast market opportunity. With its global reach, YouTube has an already established user base to which it can market its offerings.

… But Netflix’s Business Model and Content Are Better

Netflix’s content offering trumps YouTube currently as it entered the market earlier and so offers better content both in terms of quantity and a wider mix of titles. This is a key competitive advantage for now. In addition to streaming movies, the company offers streaming TV shows and allows its subscribers to rent DVDs for new movie titles. Netflix’s video quality is also better than YouTube’s, which is another advantage for paying subscribers.^[2]

We also believe that Netflix’s fee based model is better than the rent per use approach that YouTube is promoting. The pay per use is similar to Apple’s iTunes business, and we have seen Netflix’s business grow at a much faster rate using its fee based model. This seems to be a more attractive value proposition for users who plan to view multiple movies a month.

As such, we believe that YouTube’s move adds greater pressure on Netflix for sure but is unlikely to impact Netflix’s subscriber growth meaningfully in the near term. While we like Netflix’s business model, we feel that from a valuation perspective its stock price is a little heady, and we maintain a $153 price estimate for Netflix, which is around 35% below the market price.

See our full analysis for Netflix’s stock here.

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