Will This Streaming Giant Hold Off Its Competitors In 2013?
Jordo 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 been transformed into a streaming TV and movie business. The transformation has nearly been completed. When it comes to selling streaming video content, Netflix is clearly number one. In September, the company reported 25 million U.S. streaming video subscribers. The company has about 4.3 million international subscribers. Despite its industry leading status Netflix cannot rest on its laurels. Netflix has three competitors that are looking to knock it out of the top spot. Those competitors are Amazon (NASDAQ: AMZN), HBO, and Redbox Instant.
Amazon hopes to attract subscribers by offering a cheaper package than Netflix. Amazon offers a one year streaming-movie service free with the purchase of an Amazon Prime membership — $79 a year. (That comes out to $6.58 a month) The prime membership package included perks like free two day shipping on purchases, and free Kindle downloads. The problem with Amazon is that it only offers a limited selection of older movies. Netflix beats Prime on movie selection, site clarity and playback features. Netflix won’t say how many movies it owns, but informed estimates put its catalog at twice the size of Amazon’s.
Redbox Instant is owned jointly by Verizon (NYSE: VZ) and Coinstar (NASDAQ: CSTR). Redbox Instant plans to offer unlimited streaming and four free disk rentals at any Redbox for $8 per month. Redbox streaming video service should not be a worry for Netflix. Their digital library consists of only 4,500 titles. Redbox has been talking about offering a digital movie service for two years, but on January 9 it once again put off the rollout date, this time until March. I have seen the Redbox kiosks outside of supermarkets and stores such as Walgreens or CVS, and for me and I am sure that for others, the idea of running back and forth to rent videos is not appealing. Some have said that Redbox will be a Netflix killer, but Shawn Strickland the Redbox CEO said, “We’re not a Netflix killer” “We’re focused on movies. DVD’s are our core, that’s a core differentiator”. I agree with Mr. Strickland, I seriously doubt that Redbox can effectively compete with Netflix.
Home Box Office (HBO) is probably the biggest threat to Netflix. HBO is a premium American cable network, that is owned by Time Warner (TWX). As of September 30th HBO had 30 million subscribers. HBO been turning up the heat in its competition with Netflix. On January 6th HBO signed a 10 year deal with Universal Pictures. The deal was made to prevent Netflix from streaming movies from Universal pictures. The deal with Universal, which is a unit of Comcast (CMCSA) NBCUniversal, gives HBO the rights to about half of Hollywood’s big releases. With the Universal deal, as well as a menu of original shows like Game of Thrones, Girls, & True Blood; HBO is emerging as "the closest thing Netflix has to a direct competitor," argues Paul Tassi at Forbes. There is no doubt that HBO’s content is competitive with Netflix’s. The problem with HBO is that subscribers have to pay a high price to the mother channel in order to subscribe to HBO. HBO has also signed deals with Summit Entertainment, 20th Century Fox, and its affiliated company Warner Brothers. It seems that HBO’s ultimate goal is to slow down Netflix by grabbing up as many newly released movies as possible.
Netflix is easily the leading internet television network. It has more than 30 million subscribers in 40 countries enjoying one billion hours of TV shows and movies per month. Despite its leadership status, its CEO Reed Hastings is keenly aware of the of its competitors strategic moves. Netflix announced that it would be offering 14 new episodes of the cult TV series “Arrested Development” starting in May. This is part of Netflix’s strategy to make its own original TV shows. Starting next month Netflix will be unveiling six new TV shows. The first will be House of Cards (with Kevin Spacey) then Hemlock Grove, Arrested Development, Orange in Black, Derek (with Ricky Gervais) and Lilyhammer (with Steve Van Zant). Netflix will also be introducing previous seasons of popular TV shows, Political Animals, Revolution and Longmire, along with a highly anticipated new TV show named “The Following with Kevin Bacon.
In addition, Netflix signed a deal with Disney which will give it exclusive rights to stream Disney’s new releases. Unfortunately, the agreement will not begin until 2016. This is all being done in order to keep Netflix ahead of its competitors.
The competition in the highly competitive streaming video business is cutthroat. After all consumers now have choices, and they will tune into the provider that offers the most compelling content. The problem for a provider like Netflix is that content is expensive. For example, Netflix reportedly paid $100 million for the House of Cards series. While content delivers subscribers it can squeeze a company’s bottom line. In the third quarter, Netflix had net income of $7.6 billion down from $62.4 billion in the third quarter of 2011. The company will report fourth quarter earnings on January 23rd, and it has already conceded that it will lose money in the quarter. Zacks consensus estimate is that the loss will be $0.08 per share. The company said that the loss will be because of the startup expenses that are attributable to its Scandinavian streaming video launch. I think that Netflix will continue to win the war for subscribers because of its superior content and low price ($7.99 per month).
At almost $98, the stock is at its highest level since early 2012. Netflix attracts investors because it has grown revenues at a rapid pace. Over the last three years, its revenues have grown from $5.5 billion to an expected $15 billion in 2012. With a price to earnings ratio of 127 and a price to book ratio of 7.5 Netflix's stock is not cheap. However, I believe that like its competitor Amazon, (PE 3,165) its investors are buying it for growth, not for value. Netflix is a momentum driven stock that is up by 12% over the last two weeks. I think that momentum will continue to move Netflix higher.
jordobivona has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of 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!