Can NETFLIX Survive This Streaming Battle?

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

From physically delivering DVDs to providing on-demand internet streaming media, Netflix (NASDAQ: NFLX) has moved a long way in the past few years since its inception in 1997. The company has gone through various ups and downs in the recent past. Despite the stiff competition from Google’s Youtube they have somehow managed to sail pass and are now looking as a very good prospect. Let us do a SWOT analysis to understand where exactly the company stands:

Strengths

The brand “Netflix” has gained a huge popularity not just for its DVD shipment but also for providing online video streaming content. They have a confounding 20% market share in the US internet world especially during the prime television viewing hours.

They have a humongous database of over 26 million subscribers worldwide which has helped them in increasing and channelizing their library content. They also have the exclusive rights for some of the premium TV shows giving them an edge over its competitors.

From randomization to normalization: Netflix model of rolling out a new product is purely based on a statistical model giving them higher chances of success. They take a random sample of 10,000 users across their database and roll out the test phase. Based on these results they roll out their product to their huge data base of over 26 million subscribers. This helps them in achieving a better success rate.

The Nintendo Wii U gaming console was launched a few days back. Here also Netflix gained an upper hand as they are amongst the few video on-demand applications available on the console unlike Hulu Plus, Amazon Instant Video and Youtube which do not find their space in this console.

They have always been proactive in analyzing the market and understanding the “need of the hour.” In the 2000s when the internet world was at its nascent stage they went in with DVD shipment. Currently they are dealing with online TV Shows and on-demand media. The icing on the cake is the proper pricing of their product. With a mere $8 a month, it has created a higher audience reach.

Weakness

Due to a drastic technological shift in the past few years the entire concept of DVD is slowly fading out. This had been one of the prime sources of income for Netflix which has taken a huge hit. To combat the dropping sales, they decided to sell DVDs under a new brand name, Qwikster. Because of negative response from its consumer market they backed out this entire concept in October 2011. This is just to show how desperately they are trying to keep their DVD sales business alive.

They have shifted to online streaming as it was demanded. But the margin that is available in online streaming is not that high as compared to the DVD shipment. This model is driven by volume rather than margin. But a stiff competition from Hulu, Google’s Youtube, Apple TV and Amazon is not helping their cause. The inability of the users of Latin America to user Credit or debit cards has hurt them immensely which is attributed to a series of factors.

The quarterly reports have been showing losses which are attributed to the huge investment in the content and media they have made. This has not helped their cause as the reports are expected to show losses for the coming few quarters.

Opportunities

Content improvement and relationship with their dealers has to be their prime area of focus. With the competition getting tougher, it is important that they improve their content. This will help them to attract more customers and also reduce their operating cost.

They have not gained a huge market share in the international market. They should look to target the Asia region especially the growing online population of China and India. This could really act as a boon in disguise to ramp up their growth. If they continue to increase on the current trajectory and improve on their quarterly reports it could help them in gaining investor confidence also.

Threats

Amazon (NASDAQ: AMZN) is slowly but steadily making a dent into Netflix’s market-leading position. They currently have a market share of around 22 percent amongst paid internet video users. They also signed a multi year licensing deal with Epix for blockbuster movies. Epix had an agreement with Netflix which ended recently, but they were unable to continue as they lost the battle with Amazon.

Google (NASDAQ: GOOG) has been dominant in the search engine business for a long time. With the acquisition of Youtube they had clearly indicated their intentions of getting into the online streaming world. Over the years they have improved the content of Youtube quite impressively along with the video quality. They are working proactively on this segment to give Netflix a stiff competition.

Coinstar (NASDAQ: OUTR) has shown Netflix with its quarterly reports that DVD shipment is still a profitable venture. Where the figures for Netflix are declining in this segment, Coinstar is showing a rising figure like the sales guidance of $567- $569 million (a touch higher from its previous figure of $530 - $555 million).

Also let’s not ignore the competition from Hulu, HBO and Apple TV which are trying their best to gain a comprehensive market share.

Despite all the odds, the opportunities for Netflix in this on-demand online streaming are huge. If they can use these opportunities and convert them into their strength then we can expect a good growth path going forward.


jyotiadvisor has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Google, and Netflix. Motley Fool newsletter services recommend Amazon.com, Google, 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure