Netflix's One-Two Punch
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Netflix (NASDAQ: NFLX) is among the most assertive marketers that I've come across as a consumer. I did try it out for a while but decided it didn't suit my lifestyle. I am more of a cable/on demand type of person who also prefers to watch movies the old fashioned way (on a TV screen) so the streaming mobile feature -- while cool -- wasn't really for me. But they certainly never gave up trying to woo me back with specials, sales and unlimited deals. If they take this same approach in their operational strategy Netflix's growing number of rivals are in for a fight.
Netflix has had a tough go of it competing with the likes of cable television providers like Comcast and losing subscribers amid an unclear strategy and hefty price increases. Now, the playing field is getting more fierce as technology companies grasp for a piece of the multi-billion dollar streaming pie that Netflix -- for all intents and purposes -- helped to bake.
Now Netflix is relying on a one-two punch composed of an ambitious expansion plan coupled with its access to exclusive content to knock out the competition.
In the past, its lack of clarity in its strategy cost Netflix not only subscribers but also investors. Nonetheless, Netflix is focused on its future and CEO Reed Hastings recently told The Wall Street Journal that the company isn't changing its message for anyone.
"Over 20 years, Internet video is going to rise very steadily across many sectors. If an investor believes that Internet video—with its pure on-demand model—is the future of video, then Netflix becomes a very interesting part of their portfolio to ride that long-term thesis."
According to the WSJ, Netflix has no intentions of separating its struggling DVD business from the company, but Hastings admits the company sees the future in Internet video. Its leverage, according to the company, is the fact that its core business is streaming online content and DVDs as opposed to what Hastings essentially described as a sideshow offering at some of its competitors in the WSJ article.
Netflix is banking on its growing footprint internationally -- including aggressive plans of offering its services in countries around the world (with the possible exception of China) -- and its streaming trademark, or exclusive rights, to popular shows like season four of Arrested Development. Its early international push will include expanding into European countries and is scheduled to begin right about the same time that the Verizon/Coinstar offering becomes available.
While expanding into international markets is a pricey proposition for Netflix, and is likely to swing the company back into quarterly loss territory, Hastings is convinced that competitors are not going to follow his lead given the cost proposition. It seems risky, but then again since its inception Netflix never was risk averse.
Nonetheless, Netflix has some determined rivals. The recently formed partnership between Verizon (NYSE: VZ) and Coinstar (NASDAQ: CSTR) positions these companies head-to-head with Netflix's DVD business. The duo has promised to launch its subscription-based streaming services in addition to movie sales and rentals via the popular Red-Box kiosk in time for the holidays.
Both of these stocks, Netflix and Coinstar, have been hammered this year, with stock prices trading 58% and 38% below their 52-week highs, respectively. Netflix, with a market cap of about $3.15 billion has a P/E ratio of about 29.5 based on trailing earnings. So despite the stock's plight it still seems pricey especially given the uncertainties surrounding this streaming technology play's future. Coinstar is trading at a P/E ratio of just below 9%.
Verizon clearly has a much broader product and services mix than Netflix, which Netflix seeks to use to its advantage given its ability to focus on streaming content. Nonetheless, Verizon is invested in subscription streaming content and has a 65% stake in the Coinstar partnership. It is attempting to gain its share of what amounted to a $1.1 billion business in the first two quarters of this year, according to Digital Entertainment Group data cited in Bloomberg.
For its part, Verizon is determined to emerge as a standalone streaming mobile player in a competitive arena that in addition to Netflix includes Internet behemoth Amazon.com. The Verizon/Coinstar offering, which is in beta stage and being used by Verizon employees now, includes a monthly subscription package that works across mobile devices, set-top boxes and game consoles. And Verizon is looking to capitalize on Coinstar's extensive U.S. footprint that includes tens of thousands of strategically placed kiosks for rentals.
Netflix has certainly carved out a niche for itself but it is one that it is having to increasingly share with other streaming content providers. Its timing for growth in places like Europe may be questionable but that expansion is a part of Netflix's strategy. And while Netflix may have to fight harder for its domestic market share it certainly is not lacking any marketing arsenal. With its future profits uncertain it's hard to bet on Netflix shares in the near term, but the company's 'never surrender' attitude is sure to keep it in the fight for a while.
Foolish Bottom Line
The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep pocketed, rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These kinds of issues are a must know for investors, which is why The Motley Fool released a brand new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to both buy and sell the stock. They’re also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.
GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix. Motley Fool newsletter services recommend 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.