Netflix: A SWOT Analysis
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The good ole' SWOT analysis never gets old. Fundamental analysis, by itself, will never do the trick. An investor needs to know the story. For instance, what good is free cash flow today if a simple SWOT analysis reveals an extremely unfavorable competitive landscape? So let's get back to the basics and assess Netflix' s) strengths, weaknesses, opportunities, and threats in an attempt to paint a clear picture of its internal and external environment.
- Despite increasing competition, per member viewing is on the rise (up by more than 30% year over year in Q3).
- Voluntary churn is the lowest it has ever been.
- Netflix has the clearest brand identity ("Watch TV shows & movies anytime, anywhere") and greatest brand awareness among its competitors.
- Netflix out-paces its peers in improving personalization algorithms due to its larger membership base from which it can learn from.
- Compelling value proposition: $7.99 per month for the largest streaming library in the world.
- Exclusive Content: Of Netflix's top ten TV shows, six are only on Netflix, and not available on Hulu [owned by Disney (NYSE: DIS), Comcast ), and News Corp], Amazon's ) Amazon Prime Instant Video, or Time Warner's (NYSE: TWX) HBO Go. The ratio is even higher for Netflix's top 50 TV shows.
- Netflix's DVD subscription service is extremely profitable, with contribution margins around 50%.
- Unlike competitors, Netflix's subscription services allow members to go all the way back to the pilot of the first season for TV shows, resulting in a more wholesome experience and increased convenience and control.
- DVD subscriptions, Netflix's most profitable segment, are taking a nose dive: 8.47 million subscribers in Q3, 2012 compared to 13.81 million subscribers 1 year ago.
- Original content might not pan out to be as profitable as expected.
- Netflix's brand took a hard hit when they changed pricing on members. Hastings estimates that it will take three years for a full brand recovery.
- Netflix's streaming subscription contribution margins are much lower than the contribution margins of its declining DVD subscriptions segment.
- International expansion: Though still running at a loss, Netflix's international subscriptions are growing fast--up nearly 200% in Q3 (year over year).
- Original productions offer a way for Netflix to potentially increase their streaming contribution margins and connect emotionally with members. Netflix is currently in full production of four original TV series to debut exclusively on Netflix in 2013.
- Lack of use of debit and credit cards is a major factor holding back further growth in Latin America. A simple cultural and technological transition resulting in increased use of credit cards could greatly propel subscriptions in this region.
- Internet TV clearly seems to be the future of television, and Netflix is leading the change.
- As Hastings pointed out, "With big markets comes competition" - There is a clear transition from linear TV to Internet TV and competitors want in on the profits.
- Contracts with Disney, Sony, and Universal all come up for renewal within the next five years--losing any of these big contracts could have a negative affect on Netflix's value proposition.
- Hulu, which Netflix recognizes as its most meaningful competitor in the U.S., offers its members TV shows immediately after they are aired for the first time.
- Hulu, Amazon, and HBO are all investing in their own original productions.
- The U.K. remains a very competitive market in which it will take "materially longer" to reach profitability than it took in Canada.
What did I miss? What parts of Netflix's SWOT analysis need more detail? Let me know in the comments below.
DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Walt Disney, Netflix, and Time Warner. Motley Fool newsletter services recommend Amazon.com, Walt Disney, Netflix, and Time Warner. 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.