by Tony D’Altorio, Investment U Research
Wednesday, February 2, 2011
At first glance, it seems that Netflix (Nasdaq: NFLX) has “got it goin’ on” these days.
The company recently reported stellar fourth quarter earnings. Its recorded new revenue and new subscribers both beat Wall Street expectations.
It also notably boasts 20 million customers. And many see the company gaining another 10 million by the end of the year.
Since releasing that report, the DVD rental and video streaming service company’s shares have soared. With a market capitalization of over $11 billion, its stock market valuation is approaching that of media giant CBS (NYSE: CBS).
Netflix’s New Business Strategy
Investor excitement over Netflix’s new business strategy has largely fueled much of its share gain in the last year.
The company is shifting its focus towards online streaming to computers, televisions and tablet devices like the Apple (Nasdaq: AAPL) iPad. Netflix is becoming a leader in growing “over the top” services, which offer video online.
In November, it introduced a streaming-only option for just $7.99 per month. That plan now accounts for over a third of new subscriptions, as consumers shy away from DVDs.
Long-term, some analysts see Netflix partially competing with cable and satellite, as it continues to acquire the rights to stream content. One such deal with Disney (NYSE: DIS) gives it permission to stream hit shows such as Grey’s Anatomy from ABC.
So far, the new business model works well. Netflix already accounts for 20% of all U.S., peak hour, downstream broadband internet traffic.
But that hardly means it’s bulletproof….
Netflix Sorts Out Who Gets The Bill
Netflix still has to sort out who picks up the bill for delivering increasing amounts of digital video.
As the strain on broadband networks grows, internet service providers are looking to charge based on the amount downloaded. Ultimately, some party has to pay for that…
Usage-based pricing is not yet in effect in the U.S., Netflix’s biggest market. But in December, the FCC voted for net neutrality rules that leaves the door open for just that.
While the U.S. hasn’t made any definitive moves in that direction, Canada already did.
There, internet providers can charge per gigabyte downloaded. After a month’s trial, Credit Suisse concluded that moderate use of Netflix streaming would increase a typical broadband bill by $12 per month.
That doesn’t sound like much. But Netflix CEO Reed Hastings acknowledges it as “potentially a significant negative.”
Should usage-based pricing evolve similarly in the U.S., online video growth will suffer.
Netflix’s Future Growing Costs
Netflix also has to cope with growing costs elsewhere.
So far, it has done a good job of securing content from big TV and movie studios. But most of its content deals expire in a year or two.
If Netflix renews, expect content owners to demand substantially more.
For instance, the company offers $50,000-$100,000 to stream current television shows. Yet traditional channels pay millions per episode, and some providers want Netflix to do the same.
That would, of course, crimp what the company can offer. It would also limit its competitiveness against satellite and cable companies that offer a wide array of content.
Additionally, cable companies won’t just sit back and let Netflix roll over them. Already, Comcast (Nasdaq: CMCSA) has launched its Xfinity application, which can stream anything from HBO to Avatar to subscribers’ iPads.
Similarly, Apple, Amazon (Nasdaq: AMZN) and Google (Nasdaq: GOOG) all have internet TV offerings either out already or coming soon.
Bullish or Bearish on Netflix Future?
Netflix bulls and bears will continue to argue about its future path.
For instance, a study by Nielsen and Disney’s ESPN claims that just 0.28% of U.S. households switched from pay-TV subscriptions to online alternatives in the third quarter of 2010.
Bears say that indicates a lack of interest in Netflix’s services over cable or satellite. But bulls disagree, touting it as showing tremendous growth potential ahead.
One way or the other though, Netflix looks safe… for now. Its longer-term prosperity, however, seems significantly less clear.
Good investing,
Tony D’Altorio
Any investment contains risk. Please see our disclaimer.
One Response to “Is Netflix Vulnerable?”
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All I hear in this entire article is that Netflix is doing “To well” for the content providers, cable companies and satellite companies. Isn’t it a shame that someone came up with a good idea and made money from it. It’s all propaganda, like when automobiles replaced horse and buggy and cell phones replaced smoke signals. Netflix, based on volume alone could offset the additional cost with a simple $1 or $2 increase across a future 30 million plus users. Each month that would more than make up the content/cost difference and NO ONE would care one bit for .25-.50 cents a week.
You know who should be concerned, Cable and satellite services. The day the NFL leaves Satellite that medium is DONE. Cable will pick up the slack and that is where it will gain some customers. For a short time until those folks move to Internet television and Cut the cable cord. Anyone who tries to fight Internet television, Netflix and all that comes with it is a COMPLETE FOOL. I wish all the market makers would endorse cable companies instead of OTT’s and then we could wash out all the morons in the market who are paid to provide a particular opinion that is very often contradictory to common sense.
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