Netflix took down Blockbuster. Now it deals in a more complicated marketplace, with major players like Comcast and Amazon.
Netflix has transformed itself from a mail-delivered DVD rental service to an online, on-demand behemoth whose users suck up a third of all the bandwidth in North America.
Now comes the hard part: maintaining that lead in the fast-changing world of streaming video, where the competition ranges from subscription services such as Hulu to content providers like HBO to cash-rich tech giants such as Apple APPLE INC. AAPL -1.09% and Amazon.com, which offers streaming-video content to its Prime members.
With more subscribers than HBO and Hulu Plus combined, Netflix has a big lead in streaming video. And the gap is growing now that the company is gaining traction abroad. Morningstar analyst Peter Wahlstrom views this as “a headstart rather than a sustainable competitive advantage.”
What could go wrong? Big content producers could walk. They’re being paid about 20¢ per content hour by Netflix, vs. $1.20 by cable and satellite TV, according to Needham.
Netflix’s appeal would suffer if more production houses like Viacom take their shows to rival Amazon AMAZON.COM INC. AMZN -2.71% . Along those lines, HBO and Amazon announced a deal in late April that would allow Prime members to stream some old HBO hits like “The Sopranos” and “The Wire.” Wedbush Securities analyst Michael Pachter says not to overlook Amazon. The retailer may have fewer streaming subscribers now, but the company is worth seven times more than Netflix.
When Netflix began producing award-winning shows such as House of Cards and Orange Is the New Black, the company seemed to be stealing a page from HBO’s playbook. “The newer content has worked extremely well in getting new sign ups and keeping their subscriber churn levels down,” says Chris Baggini, senior portfolio manager at Turner Investment Partners, which owns the stock.
The truth is, the company must turn to original shows as a cheaper source of programming. The costs of acquiring content keep climbing as licensing contracts expire and the competition for the right to stream TV shows and movies intensifies.
“While Netflix is a big player today, it is still simply one pipe for the content to flow through,” says Wahlstrom.
After soaring 60% annually over the past five years, Netflix shares are now priced for perfection. Yet there are plenty of challenges ahead. As usage has grown, for instance, the speed at which Netflix content flows to Comcast COMCAST CORP. CMCSA -2.09% and Verizon VERIZON COMMUNICATIONS INC. VZ -0.75% customers has been slowing lately.
To address this problem, Netflix recently agreed to pay Comcast and Verizon to stream Netflix’s content more quickly. The deals, though, gives Internet service providers leverage to assess more such “tolls” down the road.
Meanwhile, Comcast and tech giant Apple are reportedly in talks to launch a competing streaming-video service that would use Apple set-top boxes. Mere news of those discussions sent Netflix stock down 7% in late March.