Netflix Moves To Become The HBO Of The Internet

| About: Netflix, Inc. (NFLX)

Netflix (NASDAQ:NFLX), by its very existence, is one of those companies that challenge the status quo of their respective industries. In this case, Netflix is looking to strike down the bargaining power of content distributors in favor of content producers. This works especially well for the consumers who will only pay for the specific services they really want. Amazon's (NASDAQ:AMZN) Prime Instant Video and Redbox Instant are Netflix's closest competition but with the new high budget serials, Netflix has really upped the ante and is now emerging as a premium cable alternative.

Original Programming is Worth the Expense

Netflix's top management has spelt one thing out clearly; original programming is "cash intensive." The positive results have come after the business released immensely popular House of Cards, a political drama with a high profile cast and crew. A new horror series from famed director Eli Roth called Hemlock Grove also started on 19th April. And the long-awaited 4th season of Arrested Development is released in just over a week.

Netflix spends $2 billion annually on content. The firm has sold nearly $500 million in bonds this year. During the conference call, CFO David Wells said that an equity offering is also in the cards, although not in the immediate term. Though, with the recovery in share price and an over-extended equity market it would be smart to strike while the stock price is high.

Netflix vs. HBO

Netflix has been moving in the direction of Time Warner's (NYSE:TWX) HBO by increasing its focus on higher quality original programming thus changing the way television serials and movies are viewed, on over cable or broadcast TV, but streamed on the internet. And it is willing to invest millions to achieve its purpose. While HBO has produced one iconic series after another, Netflix is just beginning to build that brand, but the model is a sound one. The key will be the people and the way the firm utilizes its very high quality viewer habit data. House of Cards was what came out Netflix's big data hopper and that is, for now, a competitive advantage Netflix has over its immediate competition.

Both Amazon and Redbox will follow this path blazed by Netflix and it will be interesting to watch how it all plays out. If Netflix continues to be capable of attract top-tier talent to its projects the transition will be a smooth one and give the company leverage to cut better future deals for outside content.

In its previous quarter, Netflix achieved a symbolic victory over HBO, reporting 29.17 million paid subscribers in the US versus 28.7 million for HBO as the end of 2012. The CEO Reed Hastings is aiming for 90 million subscribers. Although that might sound overly ambitious, in reality, it's a necessity at its current price points.

Although Netflix is not a traditional premium television channel but it is certainly making its mark in a big way in the television industry. Netflix is now looking to attract families with a new plan of $11.99 per month which allows four simultaneous streams. Under its regular $7.99 per month plan, a single Netflix subscriber is allowed to watch up to two simultaneous streams. The business is expecting less than 1% of its own customers to upgrade to $11.99 package. The value proposition for the house laboring under its heavy cable subscription is simply too large to ignore.

At $20 on top of the monthly cable bill HBO begins to look more attractive spun off as a separate division capable of attracting non-cable subscribers. Time Warner's boss Jeff Bewkes continues to insist that Netflix will not have a negative impact on HBO's growth, but that's just whistling past the graveyard. Once Disney (NYSE:DIS) is able to divorce ESPN and its behemoth revenue stream from its impressive cable subscription rates - and with the rise of ESPN's mobile platform and wider 4G/LTE availability that day is getting closer - cable will lose one of its most compelling reasons for existing in its current structure beyond any legislative moats that continue propping up outdated business models.

HBO-Go is in place, all that has to happen is for Time-Warner to see the writing on the wall. Disney has been backing away from content distribution to become the premier content provider in the world with its string of acquisitions. Is Disney partnering with Comcast to lay more cable? Or are they partnered with Netflix to distribute all of that content its producing under its rubric?

In the current quarter, Netflix believes that it will add up to 880,000 total U.S. subscribers to 30.05 million. The company's earnings guidance is between $0.23 and $0.48 per share; the midpoint of which is five cents above market's expectations. But, that's really just the tip of the pencil drawing out the future of things to come. Ala Carte data and streaming are the future of content distribution. With the early returns on Netflix original programming strong the firm's place in that future picture looks secure.

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.

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