Battling for Your Eyeballs
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In May of last year, I wrote an article explaining why Netflix (NASDAQ: NFLX) was misunderstood and mis-priced. In that article, I laid out a number of reasons why Netflix would not be crushed by those entering its market. In this article, I want to revisit those arguments and take a fresh look at the competition. The battle lines have been drawn, and the spoils of war are not gold or land, but the eyeballs of millions.
The price movement on Netflix's stock would make even the strongest stomach churn. Between June 2011 and today (Jan. 25), shares of Netflix have gone from $300 to $52, only to skyrocket back up to $169 per share within two days of announcing earnings (Jan. 23). During that time frame, the company has grown to 33.2 million streaming subscribers world-wide and still enjoys 8.2 million DVD subscribers. In addition to subscriber growth, there have been a number of large content deals, including an exclusive deal with Disney which will begin in 2016. Also announced this month was a partnership between Netflix and Google’s YouTube to offer a second screen tool which will compete with the Apple (NASDAQ: AAPL) Airplay. I have heard a number of arguments stating that YouTube will be a direct competitor to Netflix, but I just do not see why the two companies would team up if they are going head-to-head with each other.
Bear arguments for Netflix typically revolve around Amazon (NASDAQ: AMZN) and its Amazon Prime service. Amazon has ratcheted up its offerings available to stream since my last article, signing deals with A&E Networks which will bring in high-rated television shows such as Storage Wars, Pawn Stars, and Dance Moms. In addition to that, Amazon has taken a page from Netflix’s book and is pursuing original programming for its streaming service, but with a twist. Rather than the company choosing which programs to pursue, it will add a social aspect to the decision making process, allowing Prime members to view a number of pilots and choose which they enjoy the most. Amazon still has deep pockets and can afford to acquire content on a large scale. That being said, streaming video is not the company’s core competency, and I believe that will keep a majority of its war chest out of the game.
In my last article, I wrote off Coinstar (NASDAQ: CSTR) as being but a fly in the soup, potentially competing with the DVD side of Netflix only. To its credit it has launched its own streaming service in cooperation with Verizon, although it is currently still in beta testing. The streaming service price is comparable to Netflix at $8 per month, but you receive 4 DVD rental credits in addition to the streaming service. Information on Redbox Instant by Verizon is hard to come by, but according to some currently using the beta version, it contains a mere 5,500 titles. With only a small streaming library and a small subscriber base, I do not believe this will develop into a threat for Netflix.
Apple has been a name tossed around as a potential competitor to Netflix as well. With a cash balance rivaling the GDP of a number of small countries, it certainly seems that Apple could make a splash if it entered streaming in a big way. Fortunately for Netflix, I do not believe this will be the case. Rumors of a revolutionary television being introduced by Apple have proven to be, so far, just that. If the company does reveal a product that competes with Netflix, it will still have to contend with acquiring a content library at a price that makes sense. Loads of cash or not, it is not smart business to overpay for the goods you are trying to sell. Also, with the company selling for what many consider to be a dirt cheap price, Apple may be better off using its cash to repurchase its own shares.
Comcast (NASDAQ: CMCSA) made my list last year as a competitor, but I no longer believe that this is true. The two aspects of the company’s operations I mentioned were its Xfinity streaming segment and its high-speed internet service. With more and more people cutting their cable chords every year and switching to a cheaper alternative, Xfinity should slowly fade into the background. Looking at high-speed internet, I pondered the possibility of data caps and how that would impact Netflix subscribers. With Google rolling out a super high-speed internet service in limited markets and plans to build it out, I no longer think data caps will be an issue. Comcast is officially off of my list of potential competitors for Netflix.
In the coming quarters, I will be looking for Netflix to continue its international expansion and grow its subscriber count. Content prices may increase, but it hurts the smaller players more than it does Netflix thanks to the company’s large subscriber base. Also, the streaming business is not a zero-sum game. Each of the services mentioned above can complement each other, and combined are cheaper than a basic cable package. In my last article, one viewer commented that Netflix would never again see $300 per share. If it continues executing as it did in 2012, I think that prediction will be proven very wrong.
RoyalScribe owns shares of Netflix. The Motley Fool recommends Amazon.com, Apple, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, 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!