No Happy Ending in Sight for Netflix
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The plot got even more complicated than it already was for Netflix (NASDAQ: NFLX) last Tuesday, after Amazon (NASDAQ: AMZN) announced a deal with Epix which could do some serious damage to the online steaming pioneer over the following years. Facing increasing competition from bigger players with much deeper pockets, investments in Netflix aren't likely to have a happy ending.
Epix is a joint venture between Viacom's (NASDAQ: VIA) Paramount Pictures unit, Metro-Goldwyn-Mayer Studios and Lions Gate (NYSE: LGF), offering more than 15,000 motion pictures from the Paramount, MGM and Lions Gate libraries, among others. Amazon now has more than 25,000 TV and movie titles available for streaming, roughly about 60% of the total offered by Netflix. The Epix deal will add 2,000 movie titles to Amazon's Prime streaming service, including "The Avengers," "The Hunger Games" and "True Grit."
Investors have been concerned for some time about Netflix´s ability to maintain content exclusivity in the face of growing competition, and those concerns seem justified by the latest developments. Amazon is well known for its competitive strength, and the online retailer has plenty of experience in undercutting competition by offering lower prices.
Just like it has done with the Kindle and other business areas, Amazon seems willing to enter the competition for streaming at razor thin profit margins, or even at a loss. Amazon focuses on expanding sales and gaining market share, so it could be willing to sell streaming at lower margins than Netflix in order to subsidize growth in Prime customers and expand its base of loyal customers.
Netflix, on the other hand, doesn´t have other businesses to provide the cash flows required to compete in streaming at inconsistently low profit margins, and its balance sheet is much smaller. Amazon is entering the business with the simple aim of gaining customers without much concern for profitability, and that can certainly be a very serious problem for Netflix over the following years.
The competitive landscape could get even tougher if Apple (NASDAQ: AAPL) decides to join the race with more determination than it has shown to date. Apple has a much better business model for digital content in iTunes; the maker of the iPad simply gets paid when customers want to watch any of the video it hosts, sharing that revenue with the content producers. Netflix is in a much more difficult position, having to pay first to the producers and then hope that subscribers pay more for that content.
Apple has been friendly by allowing the Netflix app on its iPads and iPhones. But the Cupertino giant is widely rumored to be working on an ambitious re-launch of its Apple TV product, and this could materially affect the competitive dynamics between the two companies. Being the gatekeeper to millions of iPads all over the planet, Apple could hurt Netflix to a considerable degree if the competition for digital video among both companies heats up in the future.
The Netflix story is clearly not over yet, but things are not getting any easier for the main character in this movie. Judging by the evolution of its competitive landscape, Netflix will be facing some formidable challenges in the middle term. We all like happy endings, stories in which the smaller guy beats its stronger opponents through passion and hard work, but at this point, that doesn´t seem to be the case for Netflix.
acardenal owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, and Netflix. Motley Fool newsletter services recommend Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.