State of the Video Stream: Calm Waters or Rapids?

By David Henry - September 18, 2012 | Tickers: AMZN, AAPL, NFLX, WMT, DIS | 0 Comments

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It was not that long ago that Netflix (NASDAQ: NFLX) was the company that could do no wrong. Netflix rocketed to “god-status” between November 2008 and July 2011 when the stock price shot from around $20 to $295. Needless to say, over the last year, the market has trashed the red enveloped company. On one hand, Netflix made a couple of questionable management decisions (Qwikster anyone?!) and the competition has stumbled over each other trying to tear their own niche away from the Netflix giant.

Red Ocean Ahead…

The beginning of 2012 marked when the competition started to nibble at the heels of Netflix. The past 365 days has given enough time for the competition to play their cards and show us just how seriously they want to de-thrown the Netflix king. Here is a drive by summary of the more pronounced competitors:

Direct Competition

1. Amazon (NASDAQ: AMZN) is the 800lb gorilla in the room. The initial roll out of the Amazon Instant Video was weak (only 5,000 pieces of content at launch) but Amazon has been signing deals with studios and providers every chance it gets. Within the last year, Amazon has an accumulated total of +25,000 in video content and approximately 3,000 of those instantly coming from the signing of the Epix deal that was penned on September 4^th. Amazon wants the “top dog” title.
    
2. Hulu Plus, the love child of Disney (NYSE: DIS), News Corp, and NBC Universal (think Comcast and General Electric). Hulu does not aim for the streaming of movies but rather the streaming of TV shows. It has an exploitable niche that Netflix is, slightly, struggling in. Netflix typically has to wait until the season DVD releases, which can be months after the season ended. With a Hulu subscription consumers are able to access TV content the day after airing. Not a bad option if you want to cut the cable and still be relatively current in the water cooler TV talk.

 Digital Rental/Purchasing Competition

1. Wal-Mart (NYSE: WMT) is taking a slightly different approach to the streaming model. The biggest differentiating factor is that the Vudu system allows users to digitize their DVD library into a virtual library. A short-term gimmick? Sure. But it does allow for those people with massive DVD libraries the ability to watch their movies in an on-the-go mobile environment. While Vudu is not a “direct video streaming,” as customers have to rent or outright purchase, a-la-carte style, it does offer an interesting angle to the streaming market and one that should not be ignored for the long term.
    
2. Ever heard of this company called Apple (NASDAQ: AAPL)? Well, iTunes is a behemoth of a service and does offer iPhone, iPod Touch, and iPad owners the ability to rent and purchase TV and movies pretty much the day and date of the physical media brethren. That and there was this little side project called Apple TV that is slowly picking up steam. Plus, with a war chest of $27 billion in the pocket to toss around… if Apple wanted to assault the streaming marketing it could… without flinching.

… But only the Best Will Survive.

The competition is fierce. Margins will deteriorate, subscription fees might have to increase, but growth will happen. The media and the market like to make snap judgments on bad news and are overly cautious towards goods news.

Case and point: over the last year Netflix has actually grown its subscription base to 36.8 million which is a subscription growth rate of ~50% since the start of 2012. The impressive side of the number is that the subscriber base has grown rapidly despite the “great migration” of subscribers when Netflix decided to split the DVD and streaming package.

The other positive, one that is downplayed, is Netflix’s overseas expansion into Latin America and Europe. Netflix is the only company providing a streaming service overseas and, aside from Amazon’s presence in Europe, Netflix is establishing itself in a position to catch the growing wealth of consumers in merging countries, like Brazil. Yes, the infrastructure for high speed internet is not relatively accessible to all Latin countries but the booming economies are pouring billions of dollars to improve their networks.

Along with the rising wealth in the Latin countries comes the growth of discretionary spending. Netflix is investing in the marketing, region-specific content, and doing it before any of the competition does. This will pay off in the long-term as Netflix will have first dibs at an untapped market.

After the storm

The streaming market will be a cut throat industry for the coming years. The problem for investors is to dig through the media hype and the marketing spin. A holistic view of the entire state of the streaming market is necessary as a minimum requirement to fully understand what is happening within this field. Netflix is a solid company with a focused goal… the question is, is your investment style patient enough to endure the rough waves coming in the next four years?  

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