Can Streaming Save This Media King?

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The 2013 Consumer Electronics Show (CES) going on in Las Vegas this week gave way to some big announcements. Netflix ) is attempting to continue its small rally by revealing a "Super HD" streaming option as well as a handful of 3D additions to its video library.

What Has Been Happening

Netflix has seen some eyebrow-raising during the past few months. Since November, shares of Netflix went from 52-week lows to gains of 70% and a price near $100. Several investors call this simply a bounce from the bottom, while others see some continued momentum from the company.

A look at where Netflix has come from shows some promise. In the world of entertainment, where movies and TV on demand have become accepted and expected, Netflix in particular seemed to pounce on the idea. It started so well, offering anytime anywhere movie and TV show access, a cornerstone of customer expectation in a rapidly evolving market.

Netflix should be a bigger presence than it is. It should be a proverbial powerhouse not just an option, but the option. Its simple strategy of movies by mail, as many as you want for as long as you want, was the single stone that struck down the mighty Goliath Blockbuster. It was a cheaper, more efficient method of entertainment. More importantly, it gave power to the consumer. Your choice, delivered to you, no late fees. These pillars of customer service should have secured it a position of bulwark.

If that weren’t enough, the even easier method of streaming came into play. With the click of a button you had a library of movies at your fingertips, including TV shows and new releases. It quickly became the dominant force in video rentals. It even gave cable TV companies such as Comcast a run for its money, as now, consumers no longer had to pay for channels they didn’t want and the tedium of commercials before, between, and after.

Then, almost inexplicably, it stumbled. Over what? Believing that customers would accept unquestioningly a price increase. Shares tumbled almost 50% over a two day period and Netflix has been crawling back ever since.

Content Saves the Day

Content has raised Netflix from the grave. Netflix has made deals with Time Warner (NYSE: TWX) for exclusive rights to eight of Warner's drama TV series. Names include proven favorites like West Wing, Revolution, and Fringe, as well as the Kevin Bacon series, The Following.

On this news, shares jumped as much as 5.9% on Monday amid heavy trading. In a 10-week run, the stock has gained almost 65%, impressing some and scaring others.

Let’s consider the content question. According to a release, HBO now has exclusive rights for films from Universal Pictures, one of the top six Hollywood film studios.

HBO, owned by Time Warner, and Comcast-controlled Universal, said they extended their licensing agreement into the next decade. HBO will continue to own exclusive access to the movies during the pay-TV window -- the period that begins after movies are made available for sale on download and discs.

The deal limits Netflix's ability to land another big licensing agreement similar to the one it entered into with Disney late last year. A month ago, Netflix announced its most significant content deal in years when it acquired the exclusive pay-TV rights to Disney's films beginning in 2016. Netflix became the first Internet-subscription video service to get those kinds of rights.

The Competition

At the 2013 CES, AT&T (NYSE: T) unveiled a new video-on-demand service for its U-Verse TV customers. Seeing the writing on the wall, AT&T recognizes that more consumers want a web-based alternative to cable and movies. Companies like Netflix and Hulu have the idea right, just not the customer service. Its new ‘Screen Pack’ for only $5 a month will allow users to access a library of 1,500 movies from their TV, computer, or wireless devices. True, this is no Netflix library (containing some 15,000 titles), but it does represent positive movement.

While Netflix might be grabbing some, it is still in a fight with others to land rights to some popular shows and movies. It cannot take for granted the bargaining power other companies have.

While AT&T is out to put Netflix out of business, I do not see Screen Pack as a great threat. Many believe the offering is more of a defensive move to keep AT&T subscribers from leaving the service by offering something similar.

The crux of the issue is which company will have the foresight and the capacity to capitalize on streaming trends. According to Forrester Research, this year people will watch video on 3.5 devices per week, and 40% of their viewing will be "viewer controlled," such as using time shifting or services like those that Netflix provides. However, it is also the services that other companies are focusing on, like Comcast and now AT&T.

Comcast, in particular, has built three Content Delivery Networks (CDN), each with the ability to stream around 60,000 hours of video. CDNs source about 50% to 60% of traffic and are built with infrastructures that can double every 8 to 12 months. This sets the company up for some serious power to provide what customers are expecting in on demand viewing. In comparison, Netflix’s Open Connect CDN, though can handle nearly twice that of Comcast’s because it does not handle any other service than streaming.

Conclusion

Though it faces some tough competition, I believe that Netflix is trending in the right direction. The market is moving away from physical media and Netflix has the plan and power to benefit from this movement.


StockCroc1 has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of 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!

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