Can Netflix Swim Past the Sharks?

Netflix, the well run, innovative company which dispatched Blockbuster to the nether world, who, with great foresight embraced streaming video, has seen its success attract a lot of big fish to its market, and I think we're about to see a feeding frenzy.
"What?! Blasphemy!" you shout, "Netflix was first mover in internet video, giving them the advantage and the ubiquitous brand recognition so sought after by companies around the world. They're profitable, their stock has been a treat for long term shareholders, they're solid, they're going nowhere baby, they're here to stay."
Look, I love Netflix, I got their DVD's, I switched to streaming, watched whole seasons of 30 Rock and The Office on it, but since they hit themselves over the head with their Quixster PR debacle they started bleeding customers, and the sharks smelled blood in the water.
Personally, I don't like Netflix's chances. Do you?
That's not to say it's the catalyst that brought the monsters, Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOG), Apple (Nasdaq: AAPL), and Comcast were already coming for Netflix, they just started swimming faster. Frankly, I'm surprised it has taken them this long to get here.
Let's examine where Netflix is heading. First off, they have stopped promoting their DVD service (though they still offer it) and are trying to move to the streaming model they rightly see as the future. The company is spending booku dollars to expand and market itself in Latin America, Canada, and Europe, attempting to gain first mover status with a customer base for whom such services are relatively new.
They're developing their own proprietary content, along the lines of Home Box Office, and Reed Hastings, Netflix's CEO, wants to eventually sell his services side by side with HBO to the cable providers, going so far as to name HBO as his biggest competitive threat.
Reed, look around, it's one of many sharks looking to take a bite out of your customer database. You're going to be facing massive competition soon.


Netflix swims with the fishes 
 First of all, executives at Coinstar (Redbox) were probably making the wee-wee of joy, like small dogs do celebrating the return of their master after a prolonged, five minute absence, when you announced Quixster; and popping champagne bottles when you recessed DVD sign-ups to the back pages of your website. With Mom + Pop video stores gone the way of the dodo, Blockbuster nearly vanquished in the physical realm, and Netflix trying to vacate the business, Redbox has won a near default victory in DVD rentals, allowing them to add to their volume of sales, while raising prices- no wonder their stock has risen appreciably since.
HBO has HBOGo for their subscribers, streaming their own content that Netflix, well, they'd be better off trying to touch Tony Soprano's wife.
Google has been trying to buy streaming rights, and has invested 100 million into content for various Youtube channels they are creating, likely in conjunction with their Google TV plans.  
Amazon is offering their streaming video service PLUS free 2 day shipping on all your Amazon orders, for $79 a year for subscribing to "Amazon Prime." Okay, here Netflix has an advantage because Amazon's content is dated, and generally mediocre (yeah, I tried it,) but Amazon is actively pursuing new deals, and new content, in its quest to become the world's ultimate retailer.
Then there's Comcast, who recently introduced Streampix at $4.99 ($3 cheaper than Netflix) to their subscribers, or free with a premium cable subscription.
The remnants of Blockbuster, now owned by Dish Network are coming out with their own streaming service, and brag that they get many new releases 28 days earlier than Netflix.
Hulu-- Hulu Pus.
And bringing Coinstar back in the picture, they recently announced a streaming partnership with Verizon (VZ) and although few details have emerged, putting on my thinking cap, it only makes sense, that they'll be trying to offer what used to be Netflix's staple- (DVD's + streaming) and while Verizon handles streaming content, consumers will likely be sent to Coinstar machines to fulfill their DVD requests, eliminating postage and the huge expense Netflix, without a physical presence, has, allowing them to beat Netflix on cost.
So what does this mean for our heroic swimmer?

1) Netflix has no room to raise prices. They might as well pour chum into the water, they'd be swarmed with bad press, and lazy customers would undoubtedly become more aware of the sharks vying for their business- and jump ship.
2) The deep pocket sharks are either bidding against Netflix for the rights to streaming content, or own it, making them less inclined to hand it over. Either way, it will raise the prices Netflix has to pay, or allow their library to be gutted as it was when they couldn't come to terms with Starz.
3) In order to become more HBO like, Netflix is investing a lot of money in their own content. A lot. I am a content producer (check out "Devlin Made Me Do It" on YouTube- seven segments to the entire episode) so the new demand for content excites me, but do you know how difficult and how unlikely it is to create a hit show, F-ing Hard. For every Seinfeld or 30 Rock, there are thousands of shows out there that suck, and many more vying for production. It takes a remarkable confluence of events- great writing, casting, and chemistry, to make a show great. 
Netflix might find itself burning through a lot of money before they find their "Lost." 
Hastings brags that Netflix is one of Hollywood's best friends, because "We can write them a lot of big checks." Maybe Mr. Hasting's, but the moment that bank account runs dry from overspending and competition eating away at your revenues, the seats around your head table will be awfully vacant.


So what's going to happen? Our swimmer is kind of fat, trading at 28.5x current earnings. With all this competition, a lack of a real moat protecting them, either the stock price is going to fall as competition and increased content costs eats away at their profits, or some shark is going to snap them up. Stay tuned folks, cause that will be in my upcoming article. 

Comments

  1. Thanks for your analysis with details. I am living outside US so besides knowing the idea of business and the fact that it is hard to defend, I don't know about all the details of it (especially its competitors).

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