For Sale: Netflix?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past few years Cord-cutting has become a much talked about phenomena, when households that had been paying an arm and a leg for Cable or Satellite TV service switch to cheaper online alternatives or over the air free broadcast TV (Over the air can actually get you a higher quality HD picture because there is no compression as there is with Cable and Satellite). There is much debate as to how much cord-cutting is actually occurring but the trend to online and on demand TV is definitely growing. In just a few years Netflix’s (NASDAQ: NFLX) online streaming service has gone from non-existent to over twenty million subscribers. However Netflix’s joy ride has already come to an end, over the next year the rising cost to acquire content and rising competition will make Netflix a likely acquisition target, and they should sell.
Amazon (NASDAQ: AMZN) recently launched their own streaming service called Amazon Instant Video. Amazon’s offering is cheaper than Netflix’s, it is bundled with Amazon Prime which includes free two day shipping, and Amazon can afford to take a loss on Instant Video for years because they have a highly profitable business model through their other offerings.
Walmart (NYSE: WMT) is also a competitor in this field in their VUDU service and DISH Network has purchased Blockbuster after its bankruptcy and re-launched it with a Netflix like streaming service. Hulu Plus which costs the same as Netflix Online Streaming is also gunning for Netflix’s place as top dog and Hulu offers a limited ad supported service for free. These competitors do not have the strength of Netflix at this time, but they all have large companies behind them (Except Hulu). Amazon, Wal-Mart and Dish Networks all have side projects in this space which are not the parent companies bread and butter. As a result, they can all afford to take a bath on these investments as they build their services; Netflix cannot.
The race now, as additional competitors are likely to launch is who can pay the most to acquire content. In the long run this will not be Netflix, which has already reported quarterly losses due to increasing content costs and forecasted slower growth in subscribers. On top of this, the single largest content deal Netflix had with Starz, elapsed at the end of 2011 and the two were unable to reach a new agreement. Competitors are adding content rapidly though none of them have the library that Netflix has; thousands of titles are available for instant streaming on Amazon. VUDU advertises that they get newly released titles faster than Netflix and Blockbusters reincarnation means that a competitor Netflix had already put out of business once has a new lease on life. Even Youtube has been starting Channels and has announced a plan to spend one hundred million dollars to acquire content.
Netflix, Amazon Instant Video and Youtube have all secured the rights or provided the funding for original shows to launch on their platforms. Having content that they can control will help give their library stability, however Lillehammer and Arrested Development will not be enough to save Netflix. Consumers will choose their TV viewing platform based on the whole content library not just a few shows.
Netflix has the brand and they have had prime mover advantage, but now they are a likely acquisition target, especially at their current low stock market value. In the right hands Netflix would be an excellent acquisition as they have the subscribers, the brand, and they are relatively cheap. With a stronger parent company, Netflix could afford to maintain their content lead, expand internationally, and produce high quality original content. These three are not possible without being acquired. Netflix needs to be forward thinking and see the writing on the wall. They have made the online transition and are a market leader, but they cannot afford to go it alone for much longer.
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