Netflix killers? Not so fast

The streaming wars are heating up. Should you sell this video pioneer?

By Minyanville Feb 9, 2012 10:08AM
CorbisBy Vincent Trivett

The long-awaited "Netflix (NFLX) killer(s)" seemed to have finally arrived.

On Monday night, Coinstar (CSTR), the owner of the Redbox DVD kiosks, announced it will enter into a joint venture with Verizon (VZ) to supplement the physical DVD-rental business with streaming. Coinstar also bought out a DVD kiosk rival and posted profits that blew away expectations and have nearly tripled since the end of 2010. Coinstar executives say they are poaching physical DVD customers from Netflix.  

Wednesday morning, Amazon (AMZN) announced a content deal with Viacom (VIA) that will give Amazon Prime subscribers free access to Viacom's huge library of content for the same $79 per year, slightly less than the price of Netflix. 

This is where the market says it's time to sell off Netflix like any of the millions of subscribers who decided to get their movies elsewhere. Right? 

Maybe. On Tuesday, after the announcement of the joint venture between Coinstar and Verizon, Coinstar's stock exploded by almost 20% on the day. Netflix wasn't absolutely crushed by the news, but it's definitely not a positive. Netflix stock gained almost 4% before gradually falling 1.06% below the previous day's close. On Wednesday, Netflix closed down about 3%.

Netflix has been slowly climbing out of the trough since the catastrophic drop that occurred after the sudden 60% price increase and botched splitting of the streaming and mail-order programs. Since the beginning of the year, Netflix is up 79%, vastly outperforming the Nasdaq ($COMPX).

The brand is severely tarnished, but Netflix has a lot going for it despite that.

The last earnings report surpassed even the company's own expectations. The subscriber revolt of the summer and fall seems to have been stemmed. Marketing expenses have plummeted. Costs for streaming content -- the main reason subscribers wouldn't leave -- is getting higher, though. There are rumors that the proposed Apple (AAPL) iTV would include Netflix. If that turns out to be true, Netflix's dominance is almost guaranteed.

The "first mover advantage" also works in Netflix's favor. It built this whole industry and its subscriber base of more than 20 million before meeting any viable competitors. Verizon's FiOS TV, by contrast, has 4.2 million customers. Like Amazon, Netflix is showing willingness to forgo short-term profits in favor of expansion. From its privileged position, Netflix can afford to expand its catalog aggressively, keep its current subscribers, and raise its paltry sub-5% profit margin.

Jettisoning the customers
In the third quarter of 2011, Netflix lost 800,000 customers. Subscribers continued to leave in the fourth quarter, but there was a net increase in streaming customers. The ones that it lost were mostly DVD streaming customers. Many who quit the DVD service stayed with the continued streaming. Still, more than half of the profit contribution came from domestic DVD subscriptions.

Note that when the company split up the streaming and DVD services, the legacy Netflix brand was pegged to the streaming service. It made no sense to call the mail-order service "Qwikster" when it takes longer to order movies by mail than it does to stream on demand. This can be a sign that Netflix sees its future in streaming. In a conference call, CEO Reed Hastings told analysts that the company has no intention of even marketing the DVD service and that DVD subscriptions are expected to contract "forever." In the long term, getting rid of the lower margin DVD business and losing the larger workforce that it requires could improve profitability.

Content is king

The battle this year is over content. The price of streaming rights started out cheap, but studios are demanding more. Netflix customers frequently complain about the lack of streaming content, and Netflix is aggressively adding to its already unrivaled catalog and successfully negotiating contracts, some exclusive, with most of the major studios.

Amazon's deal Wednesday with Viacom only means that Amazon subscribers can now access older material that Netflix already has. The Coinstar/Verizon deal is more of a concern because they will be offering more new content.  

A bigger problem facing Netflix is the loss of exclusive streaming rights for Starz content. Starting this month, subscribers will no longer have access to highly desirable content  such as the top-tier Disney movies. The company downplayed this loss because that content accounts for only 2% of viewing time, but the lower overall quality of the 20,000+ movie catalog is a problem. On the flip side, forgoing this content saves the company money.

Wedbush Securities analyst Michael Patcher, who rates Netflix as "underperform," sees the loss of high-profile exclusivity contracts like the one with Starz as the biggest threat to the company.

"Netflix has to make a choice: Either it will have high subscriber growth due to high-cost, high-quality content, meaning profits will be small or nil; or it will have lower subscriber growth due to low-cost, low-quality content, meaning it will make money but not be a growth story," Patcher said in a recent research memo. "In our view, the high-growth, high-profit story is not going to happen."


The takeaway
Amazon's deal Wednesday shouldn't hurt Netflix's bottom line, as it gives current Netflix subscribers no incentive to switch. More competitors certainly isn't a positive for Netflix, however. A bidding war for exclusive contracts could wreck its bottom line. Don't expect a return to the stratospheric valuation from last summer, but Netflix isn't going anywhere anytime soon.

31Comments
Feb 9, 2012 11:50AM
Feb 9, 2012 7:17PM
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I too been with Netflix  for about 4 years ilove to stream and i can keep the movies as long as i want
Feb 9, 2012 3:31PM
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I hope you're joking about the savings. I ditched cable months ago. I am saving $65 per MONTH. A $79 per year bill for Amazon VOD seems like a good trade to me (and oh yeah, that includes Amazon's free 2- day shipping on tens of thousands of items for sale).
Feb 9, 2012 10:59PM
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Amazon? Are you kidding? They have no good content. I'm sorry, I should say very little good content. I tried both Netflix and Amazon free trials. Netflix kills Amazon in content.
Feb 10, 2012 11:08AM
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I've been with Netflix for years and have no intention of dropping them as a provider.   The DVD service is easy and reliable and streaming is terrific.  I have enjoyed so many wonderful series that I missed on network TV.   
Feb 9, 2012 7:02PM
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I absolutely adore Netflix. Since i ditched cable, i am saving $43 dollars a month. How could anyone not love Netflix? Not once have i had any problems viewing their shows. The costomer service is top notch. Netflix cannot be beat. I will never leave Netflix, unless they quit streaming all these movies i love. Keep on driving on, Netflix! I'm with you!
Feb 10, 2012 9:54AM
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When they increased their price, I went to streaming only. I like this option better anyways.  However, they don't add new movies often.  I have watched just about everything offered.  (I watch netflix instead of tv, as I don't have cable.)  GET SOME NEW CONTENT NETFLIX!)
Feb 10, 2012 12:00PM
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I had every intention of dropping Netflix streaming for Amazon's Prime service at the end of 2011.  I'm glad Amazon has a 30 day free trial because I quickly realized what a mistake that would be.  While we are constantly aggravated that anything we want to watch on Netflix is usually "Add", we do just order the physical DVD and it takes 1 day to get here.  However, with Amazon Prime, 99% of the movies we looked up were not free on the Prime account.  You still had to pay up to $3.99 to rent them on top of the $79 you pay for the year.  In the fine print, it does tell you that, while Amazon has over 100,000 movies in their database, they only offer about 10,000 through the Prime membership for streaming at no charge (and most of those are movies we wouldn't watch).  Unlimited access to TV series through Amazon is only if you rent each episode or if you purchase an additional series pass which gives you 5% off the rental price of each episode.  They do seem to favor purchasing the movies & series electronically but they are cheaper to buy on Amazon's site for physical DVD's and are also cheaper to buy at Wal-Mart.  I've tried Hulu Plus, Amazon, Crackle and Vudu and none offer the overall value of Netflix at this point for hard core movie lovers.
Feb 9, 2012 9:37PM
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well if the studios have their way they will keep adding to the content fee and soon the price is goanna be way up their again. these people don't think they will have to change with the times and they just keep doing business the same like they have for the last 50 years, they have tried to throw people in jail, go after the sites who offer p2p and streaming and file lockers and it just gets bigger and bigger and all they can do is buy politicians and try to get laws passed that would destroy the internet . 
 i am writing a paper on this thing called p2p and including all of the studies from both sides and so far the facts just don't add up on the side of the studios as it is so far out their with half truths and wrong figures that if it wasn't for the money they spend in trying to buy justice they would be laughed out of town.  all they would have to do is change a few things and lower prices and increase the release time of video's and offer things all around the world at the same time and presto the problem is solved and all make money just not a killing.
Feb 10, 2012 10:37AM
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I still prefer DVDs to streaming. The catalog for streaming is way too limited compared to the movies on DVD that are out there. Also, where I live, Internet service is still pretty spotty. Nothing more annoying than watching a movie and having it stop halfway because your Internet connection goes down. Now, what I would like to know is why MSN blocks my posts because it thinks they are spam, but lets a real spammer go right ahead and post.
Feb 9, 2012 6:34PM
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I love Netflix - never have I ever received better customer service. I'll stiick with them until the end!
Feb 10, 2012 12:50PM
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Put me directly into the "love Netflix" column.  I don't understand how anyone can complain about a lack of content.  The problem seems to be that everyone wants to see movies that just came out.  WAIT, PEOPLE!!!  If you haven't seen a movie that came out a year ago, it's just as fresh to you as if you saw it the minuite it was released.

Another plus for Netflix.  I am now receiving some content that is being streamed in high definition and Dolby Digital sound.  Yay!!!

Feb 10, 2012 12:53PM
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It may be just a guess, but it sounds like to me, that people still like the idea of going and retrieving the disc physically. I miss the stores (Blockbuster/Hollywood Video), but I do not miss the prices per disc rental/late fees!
Feb 10, 2012 1:38PM
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I, too, greatly enjoy Netflix. I use both their physical DVD and their streaming service. I hardly use live TV any more except for some sporting events. I just wait until series I want to watch get to Netflix and then I can see them when I want without the commercials. Netflix is stable, dependable, and I have never had a problem with their service that they weren't ready to resolve immediately.
Feb 10, 2012 8:06AM
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Verizon has some of the worst quality of services I have ever had the midfortune of using. Why on Earth would a company form a joint venture with them? WTF? Do they need a write off or something?
Feb 10, 2012 6:40AM
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I used to belong to netflix, however I am hard of hearing and depend on closed captions all the time and the streaming does not have CC. I had to leave Netflix since I couldn't read the words. Does anybody know if Amazon or any other streaming has CC on all there content? I would love to to get the streaming again.

I also heard that Netflix was being sued by the deaf community because they don't have closed captions.  I am hoping this brings closed captions to all streaming soon.

Feb 9, 2012 5:37PM
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why do Lovefilm,Netflix and Amazon not offer movie downloads outside the USA,is it because itunes has exclusivive rights and Apple are suppressing competition.

Feb 10, 2012 7:56PM
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Netflix is great. The competition is a bunch of greedy jump on the bandwagon creeps. That would not ever had given streaming movies for the price that they are forced to because of Netflix. They also somehow convinced some of the studios not to give Netflix rights to stream as many movies. That was greed and jealously of netflix being so successful.
Feb 10, 2012 2:38PM
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I've got mixed feelings about this one. I've been with Netflix for quite awhile. I am not willing to do DVD, just not worth the effort or time. I'd rather get streaming contect. In the end it seems like there is too little new stuff and Redbox has this figured out. I am not sure the problem is Netflix but probably more likely the Studios.

 

Regardless I think many people are frustrated with overpriced cable. Basically we have two ways to make money, price and volume, rarely get both together.

 

Netflix made some critical blunders. In the end the solution will likely look a lot different than any of us imagine.

Feb 10, 2012 7:19PM
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Netflix is still the way to go for me. I have done the free trial with Amazon and there are not many titles that are free under Prime. I do hope that Netflix does not keep declining in the movie area.

Also to the poster that says there is no Closed Captioning CC you are in correct Netflix does have CC I get it on both my smartphone and Fire. It may be the machine you are running it on does not support it.

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