Can't Get Enough of Netflix, eh?
Sandeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You may have gathered from the title that I am a Canadian subscriber of Netflix, a video streaming service over the Internet. I have been a subscriber since the company expanded their operations into Canada. The content that Netflix has available to Canadians may perhaps vary from what it offers in the United States, South America, U.K, Ireland and soon in Scandinavian countries. However, the streaming model that Netflix has implemented has a universal appeal, especially in countries which have good infrastructure for Internet access.
My attraction to the Netflix service model as a consumer can be summarized as follows:
- A big, ever refreshing and growing selection of popular TV and movie content at our fingertips.
- On demand streaming of content allows freedom from TV schedules and slots.
- Commercial free streaming of the content allows for better entertainment experience and precious time saved.
- Netflix 'Just for kids' menu is a hit with our kids.
- Personalized recommendation scores based on our review ratings of previously viewed shows and movies. The algorithm used to consolidate our review ratings and compile personalized recommendation scores on new content is very effective.
- Watching an entire season of our favorite shows such as 'The Unit' or 'Prison Break' without having to deal with the hassle of missing a show or having to record it or being forced to watch a rerun. Netflix resolves all that.
- Convenient notifications when new episodes or seasons are added to your favorite show.
- Ability to surf for new content and place it into instant queue for future viewing.
- Ability to use Netflix on multiple devices - computer, tablet, TV.
- Last but not least, having access to great shows, classics, movies in all genres, documentaries, foreign films, independent films and even some original content all for a very reasonable cost of $8.00 / month !
This may come as a surprise but our family has lived without cable TV service subscription for several years now as we rarely found the time to watch a show on a specific schedule and never cared enough to prerecord the shows. We chose to cut the cord as it didn't serve our lifestyle and we didn't want to throw away good money each month. What we preferred was to be able to watch a show or a movie on demand when an opportunity presented itself. Netflix service was a natural fit at a reasonable cost.
If that wasn't a lovely endorsement for Netflix (for free) than I am not sure what is? Needless to say, our family is very happy with the service and we know friends who share our view.
O.K, lets change the channel (no pun intended) and evaluate Netflix (NASDAQ: NFLX) as an investment? If you follow the advice from the investing greats such as Peter Lynch, you know that you should invest in something you understand well and are witnessing as a real trend, first hand.
Last year, Netflix got beat up by the markets for taking a bold step in realigning their company to a streaming focused service model and separating that from the legacy DVD mail model. Given that in Canada, we never had the mail service to begin with, there wasn't anything to be bitter about. History shows that Netflix made an unpopular decision in the United States as it brought changes that affected its service arrangement with its U.S. user base. It ended up alienating subscribers and investors alike in the U.S, but in my opinion, it had to bring a change or risk becoming a victim of complacency from its own success and following in the footsteps of Blockbuster. Perhaps, they could have implemented the changes differently by being more tactful in their messaging.
Remember though, that it is not whether a company makes a misstep which matters but how it recovers from it. The stock price was certainly affected but the brand appears to have held strong. It is becoming abundantly clear that the streaming service model is the way of the future which is why Netflix only offers streaming service in international markets. Netflix has experienced rapid increase in streaming subscribers in all markets.
A big concern which the Netflix bears cite about the company is the ever rising cost of content it needs to endure. Cost of content is going up and will put pressure on the bottom line for Netflix, but it will also raise the barrier to entry for the competition. The rising cost of content is also a sign of success Netflix is having with its streaming model and it appears to be managing these costs on the back of their earnings and subscriber growth. As long as they continue to drive subscriber growth, they will continue to be in the driver's seat.
Another concern the bears often point out is the cost and risk of international expansion in the face of rising content costs. One of the big surprises that the company recently delivered was their return to profitability in Q2 of 2012 with $6 million in net income and a rise in free cash flow to $11 million despite their recent foray into international markets. With a careful eye on the costs and planned international roll out, it is difficult to fault the company for being aggressive in its international efforts to raise their brand and membership.
The company is focused on acquiring good content, working on ubiquitous access, improving their user interface, improving their personalization rating algorithm and expanding its subscriber base. In the U.S, it recently reported roughly 24 million streaming subscribers.
The domestic competition: Amazon Prime (NASDAQ: AMZN) and HuluPlus which is a joint venture between NBC Universal - owned by General Electric (NYSE: GE), Fox - part of News Corp (NASDAQ: NWS) and Disney-ABC - whose parent is Walt Disney (NYSE: DIS) far lag Netflix when it comes to subscriber viewing hours, which is a testament to its service strength. HuluPlus offers mostly TV only programming from its three co-owner's content pool in the U.S and in Japan. Unlike Netflix, it carries commercials in their streams. The joint venture has had plans to offer its service in the U.K. since September 2009 but that hasn't materialized yet. HBO GO owned by Time Warner (NYSE: TWX) is the only competitor with similar subscriber strength (29 Million) in the U.S but it is focussed more on movies, sports and documentaries. Netflix sees itself as a complementary service to the offering of HBO GO.
In Canada, Netflix has penetrated into 10% of all households in less than 2 years. In Latin America, they have surpassed 1 million streaming subscribers in about 10 months. In U.K and Ireland, they have passed the 1 million subscriber count in less than 6 months and have pulled ahead of the established competition LOVEFiLM, an Amazon.com subsidiary, in such a short time frame.
The company is trying to continuously improve its metrics in all aspects of its business model. It is experimenting with content ownership with original programming such as 'House of Cards' and 'Lillyhammer' to name a few. It has recently announced that it will build out its own delivery network for the content thereby getting a better grip on future costs associated with bringing content to the ISP's.
Netflix is in the process of building its moat and raising its brand internationally. Some could argue that it is even leading that race handily against its competitors both domestically in U.S. and abroad. At this stage of the company's debut, it still has tremendous growth potential and is a promising, albeit, a speculative buy. With solid balance sheet, steady revenue growth and solid operating results, it is executing well so far and this bodes well for the company and its future. If you are looking to get in the ground floor of this new, promising and likely disrupting entertainment industry trend setter, an investment in Netflix is a good long term bet.
DeepmanBajpai has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Walt Disney, and Netflix. Motley Fool newsletter services recommend Amazon.com, Netflix, and Walt Disney. 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.
