What Could Really Play Down Netflix?

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As online video streaming becomes increasingly popular, Netflix (NASDAQ: NFLX) will no doubt see intensified competition from more companies offering video-streaming services. Because of its dominant market position as an established early mover, most expect that Netflix will be able to fend off potential challenges. However, one possible threat seems to have been overlooked by both the company and investors at large, and it has something to do with potentially better content delivery platforms from more technology-savvy competitors such as Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL).

More specifically, while Amazon and Apple can easily exert more control over how their video streaming may be delivered over Kindle and Apple devices, Netflix doesn’t have a proprietary content delivery platform, preventing it from creating a more Netflix-unique customer viewing experience. Such a hardware advantage means Amazon and Apple could deliver a hard knock on Netflix in the future as competition for video streaming deepens. Of course, Netflix customers can now stream Netflix’s content on various non-Netflix viewing devices, including those from Amazon and Apple, through embedded or downloadable Netflix apps. But how an app may work on a particular device depends on potential constraints set by the device maker.

We can all agree that more than anything else, Kindle is designed to maximize a customer's reading experience of Amazon books, and Apple’s iPhone and iPad certainly are not created with the goal of, say, delivering the best Netflix viewing experience. To the contrary, Apple could certainly leverage its hardware know-how to enhance an Apple viewing experience to attract customers to its own video-streaming service when it decides to formally enter the online video-streaming market. Similarly, with new and better video-viewing features added to its Kindle in the future, Amazon would also be able to add more customers to its video-streaming service that is already in place. Without any content delivering devices of its own, Netflix could potentially lose out in the content-streaming competition even with a more inclusive content library.

To counter against such a potential threat, Netflix can really learn something from Amazon. The Amazon of pre-Kindle days is somewhat comparable to today’s Netflix. When Amazon first started selling books online, it didn’t right away have this intimate customer relationship that the Kindle has helped create later on. Now, book reading through Kindle is something unique to Amazon. Without Amazon’s introducing the Kindle device, people would be reading books bought from Amazon, while feeling no special connections with the company.

The lack of a deeper bonding customer relationship can also be seen in Netflix. If Amazon, mostly an online retailer at the time, was able to create the Kindle reading device through a hardware-design subsidiary, known as Lab126, it may be possible and desirable for Netflix to also develop its own streaming device. This would not only help Netflix build customer loyalty, but also free itself from potential constraints imposed in devices that are developed and controlled by other companies. Certain constraints might just be put in place if companies that own the devices are also in the video-streaming business, competing with Netflix.

Netflix apps are currently available on many mobile devices, allowing customers to watch Netflix movies and shows through different devices. Most take this for granted, but it can change over time. As competition for video streaming intensifies, competitors that have their own content delivery devices, such as Amazon and Apple, might try to limit access to Netflix in favor of their own video-streaming services. Furthermore, competitors could also charge Netflix for sharing with it their own content delivery platforms. All these would add costs to Netflix’s business and worse, the Netflix business model as we know it today could be rendered inoperable. As a result, Netflix could be confined into relying on platforms where customers gain Netflix streaming access mainly through public domains, such as the PC.

There's still time for Netflix to catch up and develop a viewing device of its own, while competitors’ video-streaming services are still developing, and the issue of content delivery platform hasn’t really affected competition. But eventually, when everybody can offer the same video content as Netflix, how content is delivered will become the deciding factor for customers when choosing streaming services. By then, it would be too late for Netflix to try to build its own content delivery platform. Even though no one currently seems to be in a position to buy out Netflix, the company could lose its independence someday when it faces serious challenges from companies that can offer a better way to delivery content to customers. Whoever is able to control its own content streaming platform will likely prevail in the end.

All things considered, investors may want to take a wait-and-see attitude about Netflix and hold onto the shares they already have for now. Look for signs as to whether or not Netflix has any intention to address its lack of an in-house content delivery mechanism. A great corporate vision for the online video-streaming service should be more than just content acquisition and the mere pursuit of increasing customer subscriptions; it should also include building a better content delivery platform.

Interested in Additional Analysis?

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. 

JJtheArdent has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Netflix. Motley Fool newsletter services recommend Apple, Amazon.com, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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