Netflix's secret strength? Prime-time viewing
Heavy traffic and expanded episode content will take the edge off increased costs and falling earnings at the company.
Netflix (NFLX) earnings are about as red as its envelopes, but its server-squeezing streaming traffic is still the bright-green envy of its industry.
Netflix commanded 33% of prime-time web viewing based on Internet traffic in September, according to Sandvine's "Global Internet Phenomena Report" released Wednesday. That's up from 32.7% a year ago and 20.6% in the second half of 2010. More importantly, it's more than 18 times the the share of Amazon (AMZN), Hulu and Time Warner's (TWX) HBO Go.
Despite revenue that declined 88% last quarter from a year ago and content costs that jumped from $3.5 billion to $5 billion over the same span, Netflix's streaming audience has made it a hotter commodity than newly streamed episodes of "The Walking Dead."
Billionaire activist investor Carl Icahn saw enough value in Netflix to buy up 10% of the company and recommend consolidating it into a bigger entity like Amazon or Apple (AAPL). Netflix adopted a "poison pill" anti-takeover share strategy as a result, vowing to flood the market with shares if any shareholder's stake exceeded 10%. Amazon, meanwhile, responded to the anti-buyout measure by tweaking its Amazon Prime pricing structure and taking more money from members just to compete with Netflix's streaming service.
Why the urgency from Netflix investors and competitors? The Sandvine found that U.S. households have more than doubled their monthly phone and cable Internet use in the past year. Respondents are watching 81 hours of streaming video a month, and Netflix takes up the biggest chunk of that time. Investors want Netflix while its dominance gives it value. Competitors are struggling to seize a larger portion of that viewing schedule.
Second-place Amazon, for example, accounted for only 1.75% of streaming-video viewing in September, despite prying away some of Netflix's content through a new deal with the Epix movie channel. Amazon is now testing a $7.99-a-month subscription plan for its Amazon Prime streaming video and free delivery service to compete directly with Netflix, which charges the same amount for its base streaming package. That's not great news for Amazon Prime members, whose annual membership fee will increase from $79 to $96 under the new deal.
Streaming competitor Hulu also charges $7.99 a month for its premium Hulu Plus service. Unlike both Netflix and Amazon, however, Hulu still loads up its content with commercial interruptions. As a result, the News Corporation (NWS), Comcast (CMSCA) and Disney (DIS) joint venture's share of the streaming market is only 1.38%, good enough for third place. HBO Go lags behind at 0.52% streaming share, but is only available to HBO cable subscribers and is more of a "TV Everywhere" cable throw-in for mobile device users than a true streaming service.
Though Netflix is still sorting out its finances, its streaming growth has been a huge strength amid its competitors' relative stagnancy. Netflix added 1.16 million streaming subscribers in the third quarter and bumped up its streaming revenue by $36 million. Its DVD subscription numbers continue to erode, but Netflix just passed the 30 million worldwide subscriber mark for its streaming service last month.
After a series of missteps that included separating DVD and streaming services, doubling its costs and letting key content agreements like its partnership with Starz slip, Netflix is finally strengthening its streaming by giving the customer what it wants: commercial-free TV. A TVGuide.com survey released last month found that 73% of customers who stream video online do so to catch up on episodes and discover new shows.
"For serialized TV shows, however, we do offer an amazingly better experience, because our members can start right from the pilot episode of season one and watch multiple seasons at their own pace," Netflix told investors in its earning release last month. "Neither Redbox DVD nor the DVR truly offers this capability."
By extracting movies, adding more uninterrupted episodes, continuing to spread its streaming service across multiple devices and setting the template for streaming fees, Netflix has perfected its secret formula: a tonic of prime-time popularity that keeps other ills at bay.
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I would bet within 20 years Tops, All Video stores will be out of business(including redbox) and most cable will be the same price as online streaming. Just so they can try to keep up profits. The worse thing I see is online streaming will probably become more expensive because Greedy online businesses will become just like cable and want to charge an arm and a leg once more people switch to using it once they realize exactly how convienent it really is! The fact that this world is rapidly becoming more and more technological means that the world is going to change and everything from the TV we watch to the shopping we do will change! Those that change with it and first, will end up on top, those that dont will go out of business!! I personally have used online streaming for the past 4 years as my main source of tv, actually for my entertainment period! Its the most convienent, best of all has NO COMMERCIALS, you can truly find ANYTHING you want to watch and is still pretty cheap. Especially compared to Way over priced cable who charges an arm and a leg EVEN though they get paid by all those worthless commercials they show too!!
Redbox isn't going anywhere, small town America where internet is slow, or where people don't have the money to pay $50 a month for high speed the Redbox at the Dollar General has a longer line than an ATM at a flea market...
I for one will not pay a membership fee. There's just not that much worth watching on Netflix streaming. On demend like $2 for Walking Dead Ep on Amazon works for me way better when I have time.
Cable got greedy with their FAKE cheap reality shows like Storage Wars and Pawn Stars. Liberal news networks and replaying of 2 star movies. I took down the dish years back and enjoy the extra cash each month.
I hope Nextflix management can keep the company alive. There is no better value than their streaming service.
Glad they adopted the poison pill defense.
May all people who try to destroy Netflix get "poisoned".
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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