Comcast Poised to Challenge Netflix in Streaming War

By Chris Moore - February 22, 2012 | Tickers: AMZN, CSTR, CMCSA, NFLX, VZ | 0 Comments

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It seems like this trend just won’t end: Comcast (NASDAQ: CMCSA) announced today that they well be launching their own Netflix (NASDAQ: NFLX) competitor. In many ways Comcast’s announcement is a much bigger threat than others, particularly since Comcast is set to launch its offering Thursday. This differs greatly from the joint venture announced by Verizon (NYSE: VZ) and Coinstar’s (NASDAQ: CSTR) Redbox, which as of yet has no name and no concrete launch date. Amazon.com (NASDAQ: AMZN) also has its own streaming service which it offers to its Prime subscribers, but it is currently treated more like a bonus for Prime subscribers.

Comcast’s announcement isn’t a surprise; almost every company with ties to the space has made overtures toward streaming-video services in some manner. What does come as a surprise is the immediacy of the plan, though it is facilitated by Comcast’s strong existing position. Netflix is the second most subscribed video service in the U.S., but Comcast occupies the number one slot with roughly 600,000 more video subscribers. Another negative for Netflix is price. Netflix currently offers their streaming service for $7.99 a month; Comcast has announced they will provide theirs for $4.99 a month. Comcast will also include the service, named Xfinity Streampix, with some if its higher tier cable bundles.

The company expects to offer content that is similar to Netflix and also has the added strength of owning NBCUniversal and all its associated content. Netflix has been developing its own content but it will take quite a while to develop its own library. Comcast can capitalize on the fact that it is already producing content to help supplement the service, even if it doesn’t restrict access to it. At the very least it represents one source of content that it doesn’t have to negotiate streaming rights for. One downside is that the service is being offered only to Comcast subscribers but as I pointed out earlier, it does have a sizable subscriber base. I would expect Comcast to open the service to more customers if it sees a strong response from its current subscriber base.

In the most recent quarter, Netflix added 610,000 US customers and was lauded for its comeback, but I wouldn’t call it one. The market overreacted to management’s missteps so it had room to run but it will not return to the enormous profitability and growth it once experienced. Competition is pouring in daily and it is already weighing on the bottom line. For the last reported quarter subscriber acquisition costs rose 44% and total operating expenses were up 81%.

Coinstar’s Redbox has experienced explosive growth in its DVD rentals, a market once dominated by Netflix. The company posted a 47.1% increase in diluted earnings per share, and derives 84.6% of its revenue from its DVD kiosks. The Redbox/Verizon venture is a ways off, but is expected to provide a service very similar to Netflix’s. Amazon’s Prime service has, according to Bloomberg, only 3-5 million people subscribed, but expects that number to to climb. The internet retailer has also been working to secure more streaming rights and expand its current offering. The space is crowded, and steadily becoming more so. The price of content will continue to rise and will squeeze profit out of streaming services. Ultimately I don’t think a single service will kill Netflix, it is more likely to experience a slow erosion of profitability and a continual slowing of growth. Accordingly, I remain bearish on the stock.

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