Can These Players Knock Out Netflix?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The announcement that Verizon (NYSE: VZ) and Redbox kiosk owner Coinstar (NASDAQ: CSTR) have teamed up to provide consumers with video content, in direct competition with Netflix (NASDAQ: NFLX) wasn’t necessarily a surprise. As mentioned in an article a couple of weeks ago there had been scuttlebutt the companies were discussing a partnership of some sort.
And of course they’re not alone in exploring the online and streaming video concept, ala Netflix. Google (NASDAQ: GOOG) continues to expand their YouTube video offerings beyond the homespun versions of its users. It’s also a field Amazon.com (NASDAQ: AMZN) has decided to play in and there are almost certainly going to be others.
All In, Or Just Testing the Water?
The big question on the minds of investors and analysts is how committed are the two companies to making a serious push into this market? Netflix aficionados aren’t convinced the two are a threat, at least based on the continued rise in share price of the overbought company. Even with Coinstar’s huge pop since the announcement, CSTR still trades for about half the price of NFLX on a P/E basis --16.43 vs. over 30 for Netflix.
The questions remain largely because neither VZ nor CSTR have offered any insight into what they are willing to commit financially to the venture. The big question relates to the all important content and the expenses associated with it. Empirical evidence would suggest that with relationships already in hand, Coinstar could lead the way in this area. But without guidance from company management it leaves the door open for speculation. Are they just going to dip their toe in the water, or dive into the deep end?
Not surprisingly, if a serious cash infusion is going to come it will be from the $107 billion behemoth that is Verizon. And with $14 billion in cash on the books, they’re in a position to make a serious run at this. Coinstar, with a market capitalization of $1.83 billion after the run-up isn’t exactly cash poor but a couple hundred million isn’t going to cut it. Financing is always an option but brings us right back to the initial question – how committed are they?
It appears in the short run Netflix shareholders aren’t concerned about the impact, nor should they be necessarily – too many unanswered questions. In the mid to long-term however investors will look back and realize this was the beginning of what was foretold long ago – it was only a matter of time before some heavy hitters showed up. If and when VZ and CSTR, let alone others to follow, really get serious about competing Neflix will feel it. Content expense and good old fashioned competition will impact the already razor thin margins NFLX is dealing with as they move away from the home delivery model.
When it's all said and done it won't matter if Verizon and Coinstar are all in or not. The die has been cast and others willl follow, and not half-heartedly. Does this partnership spell the beginning of the end for Netflix? Of course not, but now more than ever investors would be wise to avoid confusing a love of the service for a love of the stock.
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