Thick Profit Margins Shore Up Netflix

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

Ever since it shifted gears, Netflix (NASDAQ: NFLX) has undeniably come a long way. From a firm engaged in DVD shipments to an online media streaming service provider with millions of subscribers worldwide, Netflix has evidently grown and given justice to its position as the king of the digital streaming industry. But while its unique selling point has been a competitive advantage for Netflix all these years, there seems to be a downside in the fact that for something that is up, there is nowhere else to go but down. Now, with positive cash flow and ever-snowballing valuations, it may be that the online streaming firm is right at the pinnacle of its success, rolling its rivals in the dust. But more firms than ever are now flocking into the digital streaming industry and gearing up to take on Netflix. Does this mean that the king might soon have to run down the hill?

Competition with the Coinstar-Verizon Merger: Do or Die?

Just when Netflix was about to drive in its flag of victory on top of the online streaming industry, there came Coinstar (NASDAQ: OUTR) and Verizon (NYSE: VZ) teaming up to rattle the cage. The entry of both firms was an initial challenge to Netflix, considering Verizon’s strong customer base. Analysts had a hunch that the wireless service provider would capitalize on its over-90 million well-paying wireless subscribers in making a pitch for its new venture in the digital streaming industry.  Since the merger, the joint venture has generated substantial revenue. However, cash flow has decreased in large doses because of its plethora of Redbox kiosk acquisitions.

Meanwhil, Netflix has been a subtle revenue taker but has managed to maintain a full-plate of cash flow, with about $17.87 million for the past twelve months. Despite discreet moves towards international expansion, the firm’s focus is still on its millions of US subscribers who are loyal and well-financed. This winning strategy makes it less likely for the Coinstar-Verizon partnership to unseat the reigning king in the digital streaming business. After all, how a firm performs in the long term is determined by its thick margins and not by its massive revenues. Netflix has both.

A Tug-of-War Among Industry Rivals

Netflix recently inked a partnership with giant entertainment company Warner Brothers Television Group to maintain exclusive streaming rights for its 2012 and 2013 online TV content. On top of that, it earmarked another contract to stream all Warner movies until 2016. Since the partnership began, Netflix has earned more than 2 million more subscribers in the United States, turning its strong subscription base to profits. Having a go at the television content and movie content markets, the firm is expected to make new records in the streaming industry in the coming years. While competitors DirecTV and Dish Network have been trying to lock their horns and jockey for Netflix’s current position, attempts have been futile. Netflix buttresses its strong customer base with strides towards international expansion and investments in the acquisition of original content, making it quite difficult for competitors to move it from its current overlying market position.

Is it a Dog-Eat-Dog Scenario with Redbox?

So here comes Redbox scrambling for Netflix. While the DVD and blu-ray kiosk is said to be an emerging rival, is it even a match? Not in any way. Netflix management has long groomed the firm in the online streaming business and has professed intentions of ruling out its DVD component. Redbox’s domination of the DVD market will not hurt Netflix, primarily because of the simple fact that it is not part of the DVD business anymore. Its shift from the traditional content viewership to online streaming subscription has been well and good, providing its millions of subscribers the best customer service possible while maintaining healthy profit margins for its future growth. So, Redbox making up 44% of the overall DBD rental market is not really much of a big deal for the online streaming king. And even with the announcement of Redbox launching its new Redbox Instant online streaming service, it has still got a long way to go before it could ever take down Netflix.

Healthy Prospect

With more and more people gaining interest in online-streamed entertainment, Netflix is up to lay its groundwork for future subscriber growth. Redbox, Amazon, and Verizon-Coinstar may be in the running, but the firm’s thick profit margin makes it a cut above any of its rivals. While its partnership with Warner Brothers is already bringing in hundreds of millions of dollars, Netflix just has to sustain its focus on its strong US customer base to catch the investing world by surprise with its consistently high takings.

JosefRayDagatan has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of 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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