Should Investors Play or Pause Netflix?

By Jay Wei - April 30, 2012 | Tickers: AMZN, NFLX | 0 Comments

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Can anyone imagine today's home movie watching without Netflix (NASDAQ: NFLX)? Another Blockbuster like the one for the old days. Netflix unarguably has the largest content library among all competitors. For a movie or TV show that you can't find from Amazon (NASDAQ: AMZN) or the iTunes at Apple, it's likely that someone else has streamed it down from Netflix. But content is only one piece of the puzzles for Netflix's business, which has seen weak customer growth. How to distribute the content is what will hold everything together. Without a dynamic and cross-boundary distribution platform, its interesting content of movies and shows won't make a more interesting display of the Netflix's business reality. 

Streaming is only a general distribution means and doesn't differentiate Netflix from other content providers, including pay TVs, that also offer streaming services. There can be ways to offer the same Internet streaming through different devices to appeal to different customers who may not all like to watch movies on a computer. This can also help Netflix eventually get rid of its DVD mailing business to dramatically reduce costs. One reason customers were unhappy about the company's earlier decision to spin off its DVD unit is that even customers who stream movies still like the flexibility of ordering a DVD for better movie watching on a TV. Diversifying streaming methods to include self-branded TV streaming will make watching DVDs unnecessary.

We can think of Netflix as a three-part business: purchasing content rights from movie studios and other content holders, signing up customers to grow monthly subscription fees and developing new ways of distributing content to customers. The first two parts are straightforward business dealings, but the third part can be a real business endeavor and is what will make Netflix's business more competitive. The company simply cannot grow its customer base by its rich content alone without developing attractive distribution media. Talking about using pleasing and charming service-delivering devices to hook up customers, Netflix can really learn a thing or two from Amazon and Apple. 

Could Amazon have sold e-books by only delivering them to customers' existing PCs or laptops? I suppose it could. Would its e-book business have been as good as it is today without the leverage of its Kindle device? Absolutely no. Amazon insisted on introducing its own Kindle device and made Kindle reading a popular trend.For many people, watching a movie on their wide-screen TV is just something more desirable, but premium channels and pay-per-view can be expensive. Netflix currently relies on using the TV set-top box from Roku to allow customers to stream movies directly to their TV. But Roku also features other streaming services from Amazon and Hulu, among others. Thus, where is the customer loyalty? Netflix has also recently partnered with Apple to allow Apple-TV customers to access Netflix movie selections via iTunes, but then the revenues are shared, plus the service is not available to Netflix customers without an Apple TV set-top box. So why can't Netflix brand its own TV set-top box, instead of marketing under Roku or Apple? If Amazon is not a device maker and can find a way to make its kindle, I'm sure that Netflix can also make its own brand of devices. Using self-branded distributing devices adds leverage for expanding and maintaining a customer base

Netflix is currently trading at seven times its book value, approximately the same level of the price-to-book ratio for Apple. Given Netflix's slow growth, investors may want to pause for now. But be ready to play Netflix again when the company shows real signs of making content delivery an integrated part of its growth strategy.    

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