Can Netflix Muscle Out Internet TV Competitors?
Ishfaque 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) has taken its investors for quite a rollercoaster ride. The shares of the Internet TV pioneer has flirted with the $300 mark, gone down to the $50s and is now hovering around $90, all in the space of two years. The company has done a bizarre job of buying back shares at very high prices in F'09-F'11 which left the company with a lot less cash, and now it has to issue a lot of debt to fund new content and expand internationally. A lot of investors are weary of its market leading position, amidst heavy competition from other Technology, Media and Telecom (TMT) powerhouses, all of whom want a piece of the action.
In addition to competing broadly with other low cost Internet-based video subscription services, such as Amazon (NASDAQ: AMZN), HBO, and Hulu. Netflix continues to see more big and established companies join the the Internet TV party, especially in the Video-on-Demand space, which is currently dominated by cable TV companies, but others such as Google's (NASDAQ: GOOG) services consisting of Google Play and YouTube, as well as, Wal-Mart's VUDU and the expected launch of Redbox Instant, which is a JV of Coinstar and Verizon Communications (NYSE: VZ), all pose emerging threats.
1)Hulu, which is co-owned by News Corp., Walt Disney, and Comcast, launched in October 2007 and currently operates in Japan and the U.S. Hulu Plus has more than 3 million paying subscribers. Just like Netflix, Hulu can be accessed from almost any device with an Internet connection. Unlike other video streaming companies, Hulu Plus portrays commercial ads on its streaming services, which reduces the appeal of Hulu to consumers because the rivals offer an ad-free streaming experience. Hulu Plus managed to increase content titles by more than 40% Y/Y, but the user experience is a lot better on Netflix.
2) Amazon: After Hulu, Amazon seems to be the most formidable competitor for Internet streaming dollars. In the US, Amazon Prime Instant Video has emerged as a bundled package between Amazon’s Prime shipping service, and its streaming library. Most of the Amazon Prime service doesn’t contain the most popular content of Netflix, which is a great advantage for Netflix. Just like the other companies in the Internet TV space, Amazon is investing in original content as well. Amazon acquired UK based LOVEFiLM in 2011, which is an established Streaming and DVD service provider in a small number of European Countries. Netflix and Amazon’s LOVEFiLM are fighting it out in the UK and both have similar pricing. LOVEFiLM has a huge leg up over Netflix in the UK, due to a much earlier start; however, Netflix is slightly ahead in terms of the content library and viewership on streaming.
3) HBO Go is entering the Internet video subscription service business with a launch in some European countries, with similar pricing as Netflix. And HBO Go will very likely enter the direct-to-consumer Internet business in the US and pose stronger competition to Netflix. HBO content is distinctly different from Netflix’s content, and HBO Go will likely get a decent number of subscribers as it has ~30 million domestic members viewing HBO. However, HBO Go is not close to the viewing of Hulu or Amazon Prime. HBO is a subsidiary of Time Warner Cable and is present in more than 150 Countries worldwide, and can be rolled out in a much wider scale.
4)Apple (NASDAQ: AAPL) has been thinking of Apple TV for a while now, and it has laid out its intentions of being a top global streaming platform. Apple already has a huge existing presence in the Video-on-Demand (VOD) market through iTunes service with ~8% market share and a fanatic consumer base. Apple can fire away at Netflix's market share, and has the cash to buy substantial amounts of new content from various studios and content providers, as it already has strong ties with a number of these studios.
5) Redbox Instant: A number of investors are very weary of the threat that Redbox Instant poses. It will have the same pricing as Netflix, but as an added bait to subscribe, the service also offers 4 DVDs that can be picked up from the thousands of the Redbox kiosks stationed across the country. According to research firm, NPD, Verizon controls ~7% of the Video on Demand market, and has a lot of content in its library, which will likely be used for Redbox Instant. However, the threat of Redbox Instant is overplayed as it will not contain TV content. And luckily for Netflix, almost 2/3rds of total streaming hours are for TV shows, so the threat of Redbox Instant will be a lot less than imagined.
6) Google Play is coming up in the pay-per-view market as well, with more and more content. Google can easily jump-start an Internet based subscription model for video streaming without too much work. Google Play is getting traction thanks to the increased sales of more Nexus Tablets, Android powered devices, and more professional content that is currently available through Google’s YouTube. YouTube is a huge competitor for any online streaming company, due to its gigantic library of free user generated content and professional content.
Can Netflix Do Well?
Not surprisingly, the shift in consumer TV consumption from regular to Internet based TV, is attracting a lot of new competition because of the industry’s long term growth prospects. Internet based TV has substantial amounts of growth in the next few years, and a big reason for this growth, is that unlike, regular TV, the consumer controls what he/she watches, and the ability to access through almost any device will provide substantial tailwind for growth. Netflix is in good shape to take advantage of the long-term rise in online video subscription services due to its huge selection library and solid brand name. Many of its competitors are offering the pricey Video-on-Demand service; however, Netflix offers a more attractive alternative in terms of lower pricing and also a great entertainment medium.
ishfaque has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, Google, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!