This Streaming Video King Is Not Going Away

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With more than 30 million streaming members in the United States, Canada, Latin America, the United Kingdom, Ireland, and the Nordics, Netflix (NASDAQ: NFLX) is the world's leading internet subscription service for watching it movies and TV programs. Among the large and expanding base of devices streaming from Netflix are the Microsoft Xbox 360, Nintendo Wii and Sony PS3 consoles, an array of Blu-ray disc players, internet-connected TVs, home theater systems, digital video recorders and internet video players, Apple iPhone, iPad and iPod touch, as well as Apple TV and Google TV. In all, over 800 devices can stream from Netflix.

Netflix recently reported results for the third quarter. Revenue reached $905 million for the quarter, up from $822 million last year. This was in line with consensus estimates of $904 million. Earnings per share were $0.13, compared to $1.16 in the same quarter of 2011, and exceeded consensus analyst expectations of $0.05 per share. Netflix reported 25.1 million U.S. subscribers for the quarter, adding 1.16 million in the quarter and 4.3 million in other countries, which included an overseas gain of about 690,000 during the quarter. This is at the low end of its forecast of 1 million to 1.8 million new adds. The company previously forecast that it would add 7 million domestic subscribers this year, and had added 2.1 million through the first half. The fourth quarter is always the most critical for Netflix, because people sign up during the holidays as they receive streaming devices as presents. However, the company would really have to work hard to meet its estimate. Netflix was profitable in the second and third quarters, but expects a loss in the fourth quarter as it expands into the Scandinavian countries of Norway, Denmark, Sweden, and Finland. This is its next large international market launch, after launching in Canada, followed by Latin America and the U.K. and Ireland.

Netflix expects domestic subscriptions at the end of the fourth quarter to touch 26.4 million to 27.1 million generating revenues to of $581 million to $588 million. International streaming subscriptions are expected to rise from 5.2 million to 5.9 million, with revenue of $90 million to $100 million. Domestic DVD subscriptions are expected to be between 7.85 million and 8.15 million, with revenue between $248 million and $255 million. Earnings could range between a loss of $0.23 cents per share and a gain of $0.04 cents per share.

Many people believe that Netflix has been clumsy and awkward in shifting its business model from a DVD-and-streaming company to a streaming-only company and, in the process, losing 810,000 net subscribers in the third quarter and taking a beating on its stock price.  In all fairness, there is nothing strategically wrong with the company's attempt to move away from its slowly dying DVD business in favor of the more potentially lucrative and scalable video streaming business though the going has been tougher than expected. People who talk about the imminent demise of Netflix tend to forget a few things. The company is profitable and has exceeded profit expectations. The predicted loss is only because of the expenditure on expanding business.  Netflix launched its streaming service in Canada one year ago, and now claims more than 1 million members and 10 percent household penetration. I believe that Netflix is in the right place at the right time with a highly affordable service that is in demand.

Coinstar (NASDAQ: OUTR) is now on the verge of launching its streaming video service Redbox Instant in partnership with Verizon (NYSE: VZ). EPIX content is available, giving Coinstar a good start in securing well-known movies.  Netflix had an exclusivity deal with the distributor, giving it access to thousands of somewhat recent studio titles but that ended recently when Amazon (NASDAQ: AMZN) was able to secure an EPIX deal for its Amazon Prime service.  And now Redbox Instant has apparently become the third.  Redbox Instant is negotiating deals on a per-subscriber basis, which means that it may be able to avoid the investment that Netflix has made on a fixed sum basis.  The one advantage that this partnership offers is the fact streaming uses up a lot of bandwidth and a recent study shows that Netflix accounts for almost one third of the North American downstream traffic in the peak prime-time period between 9 p.m. and midnight and this is where Verizon comes in. However, any special subscriber deals means that AT&T (T) would be forced to take action probably in combination with Netflix.

Some investors worry about Amazon and the competitively priced collection of digital movies and shows that it provides to Amazon Prime customers at no additional charge, but even this catalog of content is no match for Netflix. A third-party study recently showed that Netflix streams are generating almost 20 times the traffic during peak prime-time viewing hours as Amazon. In fact I would definitely consider Amazon as a potential acquirer of Netflix.  If Amazon, which already sells movies and television shows acquired Netflix, it would establish its dominance in the space and leave all the other services including Google (GOOG) and YouTube way behind. By the same token, I would also see Google as a potential acquirer.

Netflix has been able to handle competition with ease and no other service is even close. As long as cable providers continue to provide poor customer service and limited consumer subscription packages at relatively high prices, consumers will continue to look to alternative sources for their movie and television needs. I recommend watching this stock closely and buying on any pullbacks to the mid $70's.


jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Netflix. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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