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Is this the End for Netflix?

February 23, 2012 | About:
Profit Confidential

Profit Confidential

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At this point, almost everyone knows about Netflix, Inc. (NFLX). The online streaming company offering movies and TV shows on demand was a pioneer in this field, which drove corporate earnings for the firm. Such innovation and profitability in corporate earnings was bound to attract attention from competitors, many of them much larger than Netflix. Anytime you get larger competitors, the earnings outlook starts to get cloudy. Recent news that cable giant Comcast Corporation (CMCSA) is entering the online streaming market by offering its existing customers a much lower rate than the Netflix product. One key indicator of a poor earnings outlook is when a larger competitor starts to fight on price. This will hurt corporate earnings for Netflix, possibly to the point of causing the firm severe problems.

Comcast is offering its streaming service for $4.99 a month or free for customers who have a higher priced cable package. This compares with Netflix offering its service at $7.99 a month. I think there might be a significant hit to the corporate earnings of Netflix if many of its clients decide that a bundled cable package of current TV and an online database of streaming movies that’s either free or only $4.99 might entice many customers.

But Comcast is not the only one Netflix has to fight for its corporate earnings. Amazon is continuing to sign deals with Hollywood companies for its streaming service, offering movies and TV shows as well. Amazon is a giant that relies on slim corporate earnings, which can only hurt the future earnings outlook for Netflix.

Fighting this battle for corporate earnings amongst huge corporations won’t be easy for Netflix. Netflix faces lower market prices, greater accessibility for consumers to more competition, and higher costs, as Netflix has signed deals for content already and can’t increase prices to the end consumer. This is a bad business model and it’s tough to see how the company’s corporate earnings are going to expand.

One key indicator that might help Netflix is that it is attempting to produce and sign content exclusively for its own network. At this point, it is difficult to calculate an earnings outlook based on something that’s theoretical. I would need to see how much interest these new initiatives can garner and if this can stop the outflow of customers leaving for their competitors.

Management needs to differentiate Netflix from the crowd, or try to sell the firm to a larger company like Apple Inc. (AAPL) or Google Inc. (GOOG). While Netflix still has a fighting chance to survive, it will be a very tough road over the next several years, as the earnings outlook remains very murky. Corporate earnings will most likely be hurt by lower-priced competitors enticing customers to switch away from Netflix.


Rating: 3.4/5 (13 votes)

Comments

jayb718
Jayb718 - 2 years ago
You make a sensible case.

I never felt NetFlix had much of a moat and so competition will likely take market share in the future.

Nice post and it's not just because I happen to agree with your argument :-)

Cheers
ramands123
Ramands123 - 2 years ago


I think Netflix is now in business where its competetion is offering service for free or half the price.

Not sure how do you compete with that.

Whitney Tilson was right with the stock short and also buy. I am not sure if he is right with the hold consedering massive shift that is taking place in streaming industry.

On top of that Netflix not even cheap or discounted and has a significant downside risk.

Please leave your comment:


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