Will Comcast and Verizon crush Netflix?

New services have begun to threaten Netflix's already thin margins.

By Benzinga Feb 24, 2012 6:01PM

Image: Watching television (© Onoky/SuperStock)By Tuomo Kallio, Benzinga Staff Writer


This has been the year of new streaming video services. Coinstar's (CSTR) Redbox and Verizon Communications (VZ) announced this month that they will partner on a new service to challenge the market leader, Netflix (NFLX).


And two days ago, Comcast (CMCSA) unveiled plans to enter the competition by offering a streaming-video service to its Xfinity customers. In the future, Comcast is planning to make this service available on additional devices, such as the Xbox 360 and Android gadgets.


Shares of Netflix have reacted strongly to the news of increasing competition, with the stock down 11% since Comcast's announcement. Shares closed Friday down more than 1% to $111.67. The question is whether traders are overreacting or if the new competition actually poses a serious threat to Netflix.


A Dawson James analyst, Justin Colatosti, who has a sell rating and a $50 price target on Netflix, noted that even minor competition is a serious threat to Netflix, which already operates at razor-thin margins. Colatosti pointed out that Netflix's content costs are exploding, which significantly hurts the company's profitability.


Therefore, Netflix should make some drastic strategic changes, such as adjusting its content offerings. According to Colatosti, Netflix cannot offer everything for everyone, as the company's cash flow and growth rate don't support new content deals. The alternative option is to rapidly grow Netflix's subscriber base, but Colatosti said he does not see this as a feasible option because Netflix already captures approximately 50% of U.S. broadband users.


In fact, the company has been losing domestic subscribers, and Colatosti is not expecting international growth to offset these losses. He noted that Netflix is facing fierce competition in the United Kingdom and Ireland from Amazon (AMZN), and while Latin America would be the best option for international growth, it would take about five years until the demographics in the region are favorable.


Out of the new competitors, Colatosti sees the Verizon-Redbox joint venture as the most serious threat because it is the only service that will be available universally to all consumers. Other competitors' services, such as Dish Network's (DISH) Blockbuster@Home and Comcast, are only available to current subscribers and essentially serve as "sweeteners" to keep customers and attract a larger user base. Colatosti also mentioned that the larger competitors have the ability to run streaming services at a loss, whereas Netflix is more dependent on subscriber revenue.


Overall, the high dependency on subscriber revenue and increasing competition on the content front make Netflix very reliant on the growth of its customer base. This might put more downward pressure on the company's shares, which have rallied more 60% this year.


ACTION ITEMS:

Bullish:
Traders who believe that Netflix can fight the competition might want to consider the following trades:
  • Go long Netflix.
  • Short Dish Network
Bearish:
Traders who believe that Netflix will get crushed may consider alternative positions:
  • Go long Comcast
  • Go long Coinstar
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

More from Benzinga:
119Comments
Feb 25, 2012 3:58PM
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If you think you were screwed by Netflix just wait till Verizon gets a hold of you.
Feb 24, 2012 9:49PM
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I would be more apt to dump my verizon/comcast accounts than I would my Netflix.

heck ... they'll probably want to charge you for data usage as you stream you videos.  /no thanks
Feb 25, 2012 3:41AM
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I recently dumped comcast and picked up netflix and hulu. Why pay a higher price for comcast ? They are not offering any great deals.
Feb 26, 2012 12:02PM
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Both Verizon and Comcast are missing the point entirely. The point is to avoid paying insane cable prices simply to watch a few high quality programs. Many people who flocked to Netflix (and Hulu Plus) did so while dropping cable. As far as I can tell, Comcast's option simply allows you to watch their cable shows on a device other than the TV. Not exactly a big win.
Feb 27, 2012 2:30PM
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I love netflix and I will stick with I will not switch to the others.
Feb 25, 2012 9:09PM
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big problem is comcast can afford to operate at a loss until netfilx is gone, then they will screw everyone over. they got orland township to sign exclusive deal for cable by saying they would treat customers fairly. as soon as competition was gone it was party time for comcast.. get ready for them to do it again.
Feb 25, 2012 9:00PM
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Netflix may not be the greatest but if it comes down to comcast/verizon or nothing I can live with nothing!!!
Feb 27, 2012 1:17PM
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Anybody that gives Comcast a penny of their hard earned money deserves what they get - a steaming pile.

I left when I called one day for customer assistance and they hung up on me due to the call volume.  The message even said so. 

Since they had too many customers, I decided to help them with that and left.  They will not get another penny of my money as long as I live. 

Some days I even think about boycotting NBC just to deny Comcast the ad revenue.

If they bring their usual level of "service" to streaming video, Netflix has nothing to worry about.

Feb 27, 2012 2:23PM
Feb 27, 2012 2:05PM
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Commercial Free viewing is priceless. Even DVDs have mandatory commercials now, cant skip them... I will keep supporting Netflix as long as it takes. Just watched 30 Rock, last season, three episodes in a row, WITH NO COMMERCIALS. Watch a TV episode with no commercials and you will see why Netflix is worth every penny.

Those big media companies want to stop Netflix because they are finally letting the consumer enjoy content without commercials. The world just seems brighter when you dont have obnoxious car commercials and Exxon propaganda thrown at your face every 15 minutes...

Feb 27, 2012 2:24PM
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If people buy into this comcrap verison bull you will be setting the stage for the end of the all you can eat style movie streaming. Go ahead and pay the 2 to 6 dollars a movie through the likes of services like vudu, cinemax, blockbuster, and soon comcast. Netflix = 8 dollars a month unlimited moives versus the competitor's average 4 bucks a pop and more for highdef quailty. And for the people who might argue that netflix has a limited selection for new realeses well then you also have the option to just order by mail which carries most of the new releases. better yet you also have the option to do both. by mail and streaming for a total of $16 dollars a month which still is a way better deal when you add up the cost of watching just a few movies through the other guys. It's a no brainer and that's why the other guys hate netflix so much. Don't buy into the B.S Yeah ok so netflix raised their prices and people left. That will teach netflx a lesson.  I will leave now and and pay the even higher prices of the competitors. Hello? mcfly? is anyone home?
Feb 27, 2012 2:35PM
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Will Comcast and Verizon crush Netflix?

 

NO! NO! AND NO!

Feb 27, 2012 4:32PM
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I have cable, and the funny thing that happened to us we also have Netflix, the remote control for the cable box got lost don't know what happened to it don't care, but we've been watching Netflix ever since and believe me we don't miss cable at all. for $8.00 plus tax and you get all kinds of tv. shows, Documentaries, and yeah old movies. but keeps you entertained for $8.00 bucks. and commercial free, what can beat that deal??
Feb 27, 2012 12:25PM
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netfix!!! if  you want to be on top?????? Get more recent release movies!!!!!!!!!!!!!
 simple solution!!!!!!!!!!!


Feb 27, 2012 2:47PM
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Will Comast and Verizon crush Netflix?  What a dumb headline that has no basis in truth.  Comcast has light years to go to provide a service that is anywhere near the quality of Netflix.  Comcast cable quality is very poor!  GO NETFLIX!!!!!!
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Want MY opinion? Netflix crushed itself last when its CEO made that incredibly stupid decision to hike up the prices.Didn't they learn anything from BOA's big mistake? Don't mess with consumers and our money;in the end,WE PAY YOUR BILLS.
Feb 27, 2012 5:15PM
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I sometimes watch Hulu.  I did last night to play catch up with the 932 episodes in my queue.  OMG the commercials!  Offensive, so not funny, and annoying as hell.  Netflix has no commercials.  Bliss.
Feb 27, 2012 3:18PM
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NO! And I do NOT want Comcast in my area PERIOD!!!!!!!
Feb 27, 2012 2:39PM
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Go Netflix! It's worth it just for my kids alone, the children's tv series keeps em' entertained especially Power Rangers! I like their foreign movie selections as well as the documentaries.
Rock on Netflix, I'm going long with guys!

Feb 27, 2012 1:27PM
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COMCAST SUCKS!  They continually raise prices and cut channels and service, and call it a "Service Enhancement"!   I guess it's nice to have Congress in your back pocket.
I have no complaints about Netflix whatsoever. 
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