Verizon and Coinstar Join List of Netflix Challengers
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
Verizon Communications (NYSE: VZ) and Coinstar (NASDAQ: CSTR) announced a joint venture today, aimed at the video streaming market. Coinstar, parent company of Redbox, will own 35% of the venture, with Verizon owning the remaining 65%. Verizon currently offers streaming services to its FIOS customers, but hopes to use the new venture to reach a significantly larger market. Neither company was forthcoming with additional information but it does highlight a problem that Netflix (NASDAQ: NFLX) is hurriedly trying to fix: anybody with sufficient resources can enter their primary business.
Netflix had a miserable year last year but has since posted incredible returns. As of today’s close, Netflix has returned an eye-popping 86.53% year to date. Last month the company posted impressive growth at a time when most were expecting a significant decline in subscribers. The company added 610,000 customers in the US but that’s only half the story. Earnings fell by 14% for the quarter and the company predicted a first quarter loss in the range of $0.16 to $0.49 a share, in addition to some interesting changes in their reporting going forward. The company will no longer be reporting churn, gross subscriber additions, or subscriber acquisition costs, which is a significant change for those who follow their earnings. The company is stepping away from transparency and that is very rarely a positive, particularly when it comes to earnings reports.
Netflix’s earnings did highlight one thing; they are the dominant streaming content service. The company has 24.4 million subscribers, a total that none of its competitors can currently muster. Redbox boasts that an impressive 30 million people use their kiosks, but that doesn’t have the same weight as 24.4 million people who pay a recurring fee in terms of future earnings. That’s where the joint venture comes into play. If Verizon and Redbox can corral their respective customer-bases, they might pose a legitimate threat.
As I mentioned earlier, the looming problem for Netflix is the lack of a moat. There are very few barriers to entry and the company could quickly lose its first-mover advantage. In the UK, Netflix’s recent arrival has spurred British Sky Broadcasting Group, the UK’s largest pay-TV broadcaster, to begin plans for its own streaming service. The group has more than 10 million subscribers and intends to leverage that subscriber base into a strong streaming presence. Stateside, in addition to the newly announced Coinstar/Verizon joint venture, Netflix has faced challenges from Amazon and Hulu Plus, as well as Google’s (NASDAQ: GOOG) increasing efforts to turn YouTube into a serious competitor. Google has committed $100 million to create exclusive content for its YouTube channels and has enlisted several big names to head their own channels. Google has chosen a different path than the others, presumably to avoid the expense and difficulty of competing for content. The increased competition will increase the content costs for all involved, and that will have significant effects on Netflix’s profitability.
The streaming service space is quickly becoming a heated competition, and that competition is ushering in the next phase: content creation. To Netflix’s credit, they have already made strides towards content creation and have already released their first original show, “Lilyhammer." All 8 episodes are available for streaming and the show is also being aired on Norwegian television. According to Netflix, the show is a national sensation, drawing 1.2 million weekly viewers in a nation with a population of 5 million. Also on the slate are several new shows, including a Kevin Spacey vehicle and a fourth season of fan favorite “Arrested Development”.
I think it’s clear that Netflix’s best option is content creation. Redbox has been picking up sizeable market share in the DVD rental business and looks poised to continue with their acquisition of the Blockbuster rental kiosks from NCR (NYSE: NCR). Redbox has agreed to pay up to $100 million for NCR’s entertainment assets including the DVD kiosks, the entire DVD inventory, and certain retailer contracts. If the joint venture is similarly successful, Netflix could be in serious trouble without its own unique content to add and keep subscribers.
I’m not bullish on Netflix, particularly after the significant gains of the past month. I expect the company to have a rough year going forward, though the shift toward unique content is positive decision. Coinstar is interesting, but because it derives so much of its revenue from DVD rentals, I’m waiting to see more details of the new venture.
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