Netflix Wilts in the Face of Competition
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The stock of the world's largest video subscription service company, Netflix (NASDAQ: NFLX), plunged 25 percent after announcement of its second quarter earnings report. That now makes Netflix the worst performing stock in the S&P 500 index so far in 2012.
The main reason for the decline is that the company added only 530,000 streaming customers in the second quarter in the United States – 70,000 below expectations – raising strong doubts whether Netflix will be able to meet its target of 7 million new U.S. subscribers by the end of its fiscal year. Netflix was also cautious about the outlook for the third quarter. Its CEO Reed Hastings stated that the Summer Olympic games “are likely to have a negative impact on Netflix viewing and sign-ups”.
Maybe so, but the real reason Netflix is struggling can be summed up in one word...competition.
Mr. Hastings himself warned about the competitive threat to his company coming from the cable companies which are upgrading their online video services. Take Comcast (NASDAQ: CMCSA) for example. It was passed last year by Netflix as the world's largest subscription video service, but it has struck back hard this year. In February, it launched a new product called Xfinity Streampix for its 22 million subscribers that gives access to a similar library of movies and TV shows as Netflix. This service is free for some existing customers while costing others $5 a month. This compares favorably to Netflix's monthly fee of $8.
There are other strong competitors entering the battle too including telecommunications companies such as Verizon (NYSE: VZ). It formed a joint venture in February with DVD kiosk operator RedBox, which is owned by Coinstar (NASDAQ: CSTR), to offer a video streaming service which will directly challenge Netflix and the cable companies. It will be available to anyone with a broadband internet connection in the U.S. The service called 'Redbox Instant by Verizon' has just begun internal alpha testing and is expected to be launched later this year.
Finally Netflix also has competition from other streaming video services that have been around for a while including Hulu and Amazon.com (NASDAQ: AMZN). Amazon's video strategy is still evolving from trying to convert DVD buyers to digital video to a new value-added strategy for Amazon Prime. This is the company's $79 a year premium program that includes free shipping and other benefits such as streaming 18,000 films and TV shows at no extra cost. At the least, Amazon hopes to offer a better service than other retailers such as Wal-Mart.
Overseas too the company faces stiff competition. Netflix's initially successful launch of its service in the United Kingdom now will have to face a tough new competitor in British Sky Broadcasting's Sky channel. It is coming out with a premium online video service. Even Netflix's Mr. Hastings said, “Going forward, competing effectively with Sky is our core and substantial challenge [in the UK].”
While all of these competitors are nipping at Netflix's heels, the company still needs to somehow keep growing rapidly in order to continuing paying the $1.2 billion in commitments to media companies including Walt Disney, CBS, Warner Brothers and others for the rights to their content. If growth continues to slow, that may become a problem somewhere in the future.
Bottom line here for investors is that this once Wall Street darling should be avoided. The business it is in is becoming vastly more competitive and it is becoming harder and harder to see who the winners will be or what Netflix's revenues or earnings will be a year or two down the road.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Netflix. Motley Fool newsletter services recommend Amazon.com 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.