It's amazing how technology works. Gone are those days in which you'd buy a television on the basis of screen size and resolution. Gadget manufacturers have taken entertainment to a whole new level. Streaming was once considered an option only for computers. Look at where we stand right now, a wide range of electronics have the capability to stream media. Consumers opt for devices like the Xbox, PS3, smartphones and televisions judging them by the services they provide. Companies like Netflix (NASDAQ:NFLX), Hulu, Amazon (NASDAQ:AMZN), etc. provide streaming services to a host of gadgets. Let's review how these entertainment companies are battling it out.
Netfilx has recently launched a new series, House of Cards, it's all over the internet and it's a Netflix original. Netflix claims to be the best as far as their streaming library is concerned. They've hosted numerous TV series and movies. The problem with Netflix as a company is the fact that the content they host can be easily bought by the competitors who have deeper pockets. Amazon recently struck a deal to gain exclusive rights to a popular show, Downton Abbey with PBS. Henceforth, Netflix users who would like to watch seasons 3, 4 and 5 have to buy the DVDs or opt for Amazon Prime. Situations like these force companies like Netflix to create their own media content.
Buy or create?
House of Cards as of now has two seasons consisting of 13 episodes each. The total cost Netflix has incurred for this is $100 million. Netflix expects more than 1 million users to subscribe to Netflix by the end of this year because of this show. How good is that? Well, rival shows like HBO's True Blood have 5 million users glued to their screen when they air an episode. By the popularity of the show we can say that about 20% of the viewers subscribed to HBO because of True Blood; does that mean Netflix would reach similar heights airing originals? I'm not too sure about that.
As far as original content is concerned, Time Warner's (NYSE:TWX) HBO has attracted more than 30 million viewers who pay an extra $15 to their cable company for HBO's services. HBO hosts a list of TV series like The Sopranos, Game of Thrones, The Wire and plenty more. Viewers are paying for what they get and HBO is fetching revenue. The threat for Netflix is HBO's streaming services is now available in Xbox, PS3, Smart TVs and many other such devices. It won't be long till HBO finally decides to chuck cable TV and start its own gig. Netflix is all set to invest $300 million in the next three years on originals and start an empire of its own. An additional 1 million viewers over the next three years would meet the break-even point. Doable? Absolutely.
The profit or loss story
In the recent report, Netflix has over $5.6 billion content obligations, out of which $2.4 billion is due this year. This figure was $1.2 billion two years ago. This suggests that switching to originals is going to help Netflix reduce costs to a very large extent. Netflix has only 33 million subscribers as of 2012. This is the reason why the company is struggling to make profits in recent quarters. As far as the future is concerned, Netflix CEO Reed Hastings has stated in his letter to shareholders that the company is planning to fetch expansion capital through debt and not cash.
Netflix is well aware that the battle for living room space also involves big names like Amazon, HBO and Google (NASDAQ:GOOG). These companies can easily bully Netflix and buy licenses like they were spending money on peanuts. The only few options Netflix has in their hand is to make sure they come out with very strong originals or else ensure that they've also got a very strong cash pile.
Right now Netflix is the best in the industry as far as online video streaming is concerned, but the fact of the matter is that Netflix is skating on thin ice and they better be ready for a clash with the titans. Subscribers and originals, these are the key factors for Netflix's future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.