Deciphering the Content Haze With Apple And Netflix
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is challenging to write about the race for online on-demand video content without stealing one’s heart for the onslaught of mixed emotions that are sure to follow. One must consider Apple (NASDAQ: AAPL) and its cult-like followers, who might stand in line for days if Steve Jobs rose from the grave to brand the i-slap-in-the-face. One must consider Netflix (NASDAQ: NFLX), which has spent the last several quarters seemingly attempting to create a b-school case study on how management can prepare for Christmas dinner by butchering the goose that is laying golden eggs. One must consider Comcast (CMCSA) whose customer service takes shoddy and offensive and goes pro like no other profit-driven business I have ever encountered. One must consider Amazon.com (NASDAQ: AMZN) whose quirky little product line seems potent, but still like a compromise from what one really wants. And one must consider Time Warner (TWX) whose corporate identity in this space can best be described as a surprise.
Rather than opining on the existential nature of life or wondering why we cannot all simply pick up a book, head outside into the summer weather and reclaim some semblance of sanity – yes, that book might be read on a device manufactured by either Apple or Amazon – it is important to remember the goal of stock market investing. While, as a general rule, it is preferable to not own the stocks of companies that one particularly dislikes, with a market capitalization of over $77 billion, Comcast has found a way to make it despite being such a challenge to their customers. The focus must be on the future and which, if any, of these companies will be able to pull away from the pack and make money for shareholders.
The Apparent Leaders
The two companies that standout as the apparent leaders are Apple and Netflix. Where Apple has established a significant following through its iTunes service, Netflix is the low-cost provider. As some evidence that this area is heating up, two analysts recently released pieces taking shots at each of these companies in favor of the other. In the first, Aabha Rathee proclaims that Netflix is “thrashing” Apple. The piece references the dramatic explosion in both the size of this market and the shifting market share for each company – reportedly, the total market size in 2010 was about $4.3 million as compared to $454 million today. During that timeframe, Apple’s share fell from 60.8% to 32.3%, while Netflix ballooned from less than 1% to 44%. What the article fails to acknowledge is that the growth in the industry is such that both companies have done very well. Apple would clearly prefer to own 32.3% of a $454 million dollar market – say, $146.6 million – as opposed to 60.8% of a $4.3 million market – say $2.6 million. Another missed conclusion is the trend that is underway. Netflix’s missteps have caused many subscribers to seriously consider alternative options.
Enter research piece number two in which Daniel Ferry proclaims that content is the key to this industry and that Netflix is rapidly falling behind. Mr. Ferry takes the position that given the weak cash position and lack of direct access to content, Netflix is likely to continue to decline. He points out that both Time Warner and Comcast have access to both original content and a distribution network – Time Warner has rolled out HBO GO for distribution, while Comcast bought NBC to address the content creation side of the business. He points out that Amazon has a certain generosity for retailing, while Apple’s technology and sheer cash dominance will make it a fierce competitor. The option that Mr. Ferry overlooks is Verizon Communications (VZ) which has made a huge push to become competitive in this arena. Verizon is not the focus of this discussion, but it should not be counted out. While its distribution network for residential services is currently limited, as communications continue to push between single-location limits, its wireless capabilities will become significant.
Choosing A Winner
In terms of content and distribution, the advantage probably goes to Comcast. Given the sheer size of the company’s customer base, if Comcast can offer a quality streaming video product at a competitive price, rolling it out as the next in a long line of add-on products should be a winning strategy. Just as Comcast was rapidly able to become a phone company, becoming a simple choice for additional content should allow the company to make significant inroads into obtaining market share. With this in mind, if Netflix can find a way to re-invent itself, stop losing critical content and hold on to its existing customers, it will remain a significant player.
Given the above, why choose Apple for one’s limited investment dollars? Within this specific industry, Apple has an enormous distribution network through iTunes; the program resides on the home computers on anyone with an iPod, iPhone or iPad – so just a few people. As the company becomes more competitive in this space, converting customers will be very straightforward. Customer conversion is one of the largest barriers for companies in this space. Plus, there is the insignificant detail of the rest of the company. As the maker of iPod, iPhone, iPad and countless other personal electronic devices, the company is quite successful. The ability to integrate content delivery into its product offering may allow Apple to remain on top for quite some time. In the interim, an investor wanting to take a position in this space will be well served by owning Apple. As the dynamics in video delivery play out, Apple’s proven abilities in consumer electronics will provide returns while one waits.
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