What Does The Future Hold For Netflix?
Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The bad news doesn’t seem to end for California based Netflix (NASDAQ: NFLX) as its rival, Amazon (NASDAQ: AMZN), just made a three year deal that contributes about 3,000 movies to its video streaming service. But guess what? This deal was made possible just because Netflix decided to break up its exclusive partnership with Epix (owned by Lions Gate Entertainment, Paramount Pictures, Viacom and MGM). But was this seemingly stupid move really helpful for Netflix?
Well, the company came to the conclusion that owning exclusive rights to Epix's content no longer made sense due to its relatively low viewership (5% of total viewing hours). Hence, the steep $200 million it had to pay every year turned out to be a bad deal, although Netflix has still retained non-exclusive rights to stream Epix’s content for at least another year.
On the other hand, for Amazon, the deal gave it an added advantage as Epix possesses an extensive variety of Hollywood blockbuster movies, including "Iron Man 2." and recently released "The Avengers." Besides Epix, Amazon has also made deals with other content providers in the past such as Viacom, NBC, and Warner Bros, adding a slew of popular content to its library. As a result, there is a fear that many subscribers might cancel their $96 per year subscription with Netflix in lieu of Amazon’s Prime service which costs just $79. But it’s not just Amazon that’s giving Netflix sleepless nights.
What's even more worrying is the fact that Epix could join forces with companies such as Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). Both of these companies possess vast amounts of cash that can easily be used to break into the streaming video space. Apple can easily leverage the sucess of its iPhone and iPad products and offer a great variety of online video content through these devices or possibly even start its own online video streaming service. As for Google, the possibilities are exponentially greater. Not only can it offer video streaming through its ever so popular YouTube, but can also specially promote such an offering through tablet and smartphone devices running its Android operating system.
If this were to happen, Netflix’s relevance as an exclusive video service provider would surely fade away very quickly.
A tumultuous existence
Netflix once used to thrive on its DVD rental service. But with people increasingly going online to fulfill their entertainment needs, the company decided to bring its content to users online via their PCs, tablets and even smartphones. Unfortunately, the online content business didn’t attract the kind of margins the company used to enjoy with its DVD rental service.
Today, this decision is costing Netflix billions in license fees. According to the company’s quarterly reports, it has entered into numerous online video licensing contracts that would cost it a whopping $4.5 billion through 2015.
The rising tide of costs associated with online media content has in turn made Netflix take some difficult decisions. Besides the Epix breakup, the company recently gave up rights to video content from the Starz channel this year, after concluding that it did not justify costs associated with it.
Shrinking Profits
A look at Netflix’s Income statement shows that while second quarter revenue increased by 12.75% from the prior year period to $889 million, revenue costs and operating expenses combined saw a 30% jump on a year over year basis. Even worse, Netflix’s lofty second quarter net income of $68.21 million fell to just $6.1 million. Ouch!
The company’s balance sheet also doesn’t look very healthy either. As per its second quarter results, Netflix had only about $813.34 million in cash and short term investments.
So what’s in store for Netflix?
Well, there is no denying that Netflix still enjoys a much larger library of online video content with an established brand name. However, the company is witnessing the entry of more players with deeper pockets, who can well afford to offer video services at lower rates. Besides that, the entry of more players in this space would also give rise to a bidding war for content.
Last year, Netflix raised about $400 million through the issuance of common stock. If the cash runs out one more time, the company would probably have to raise more funds in that manner, leading to further equity dilution. With rising costs and dwindling cash balances, I say that Netflix would probably have more pain in store for shareholders in the future.
So what do you guys think of Netflix? Feel free to express yourself in the comments section below.
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kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Netflix. Motley Fool newsletter services recommend Amazon.com, Apple, 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.If you have questions about this post or the Fool’s blog network, click here for information.
