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Amazon And Hulu Could Slow Netflix Growth In 2014, Morgan Stanley Says

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Original series like House of Cards and Orange Is The New Black may have helped lift Netflix to new heights in 2013, but could the fever start to fade in 2014? According to a new report from Morgan Stanley , Kevin Spacey and Taylor Schilling might not be enough to fend off competition from Amazon, Hulu and HBO GO.

Morgan Stanley downgraded shares of Netflix Tuesday morning, lowering its rating to underweight from equal-weight and adjusting its target price to $310 per share, down from $333 per share. While the rate of consumers discontinuing their subscriptions may be approaching record lows -- a projected 3% by the end of 2014 -- lead analyst Scott Devitt writes that increased competition from Amazon Prime Instant, Hulu Plus and HBO GO could take away Netflix's ability to grow its subscriber base in 2014.

"We believe digital video distribution has become largely commoditized and it may be easier for some Netflix competitors to gain their next 5 million users than it will be for Netflix," Devitt says, noting that Amazon and HBO in particular likely have millions of paying customers who do not yet use their respective video streaming services. And unless "cord cutting" becomes more prevalent and the absence of a cable bill provides consumers with more discretionary income to spend on digital streaming sites, Devitt believes that most consumers will only use one or two streaming services. This would leave Netflix with less room to grow in coming years.

It's not that Netflix's business model is deeply flawed -- on the contrary, Devitt calls the service's $7.99 per-month "all you can eat service" one the best values in online media and sees additional value in the recently-announced $6.99 per-month single-screen streaming option and the $9.99 per month 3-streams-at-a-time package. But television addicts might get more programming from Hulu Plus, while HBO GO provides significant competition in the film category.

"Hulu Plus carries current season episodes for 5 of the top 6 US broadcast networks, which is something that Netflix is only able to do for a select few shows in international markets," Devitt says, noting that parent companies ABC, NBC and Fox have made huge amounts of their content available on Hulu, which currently boasts a TV catalog of  86,000 episodes from 2,900 TV series. In other words: Netflix may be great for binge watchers, but cord-cutters looking for next-day viewing of their favorite shows are likelier to go to Hulu Plus.

Netflix's footing in the movie space is also seeing competition. "We think HBO GO has the most quality movies of the streaming video on demand (SVOD) services and is the clear leader by a wide margin in original programming, which could lead to added subscriber stickiness for HBO and prevent some of its members from feeling the need to subscribe to other SVOD services," Devitt writes.

Amazon Prime Instant Video is a smaller competitor, with just a 2% share of streamed TV programming. However, Devitt believes the service offers the best value to consumers, as it comes free with any Amazon Prime membership (which is $79 per year, cheaper than Netflix's cheapest, $6.99 per month option). Paired with a recent Amazon announcement that Prime membership is in the "tens of millions," Devitt says that there is "a real risk that Amazon could narrow Netflix’s realizable US [total addressable market] if Amazon members are finding Prime Instant Video is good enough that they don’t need to subscribe to a second service."

Ultimately, Devitt concludes, "our key takeaway is that there may not be as much domestic opportunity as some investors think," adding that 60 million subscribers over the long term might be a stretch, and investors shouldn't forget about consumers who subscribe to Netflix but then later cancel.

Shares of Netflix, which finished 2013 with a whopping 300% return, were down 4.5% in Tuesday morning trading following the downgrade. Amazon, meanwhile, was enjoying a 1.1% bump; its 2013 growth was closer to 55%. Morgan Stanley isn't the first to question whether Netflix can replicate its meteoric growth in 2014: Forbes' Sam Sharf recently reported that investments experts are naming the company among those that could take a pretty good hit in the stock market this year. To see other 2013 winners that are set for a slide in 2014, click through the slideshow below: