Currently, pay-TV operators are finding it difficult to retain and acquire new subscribers. This is due to an increase in the number of subscribers who are shifting from TV to laptops, tablets, and even smartphones to watch their favorite series or documentaries. In order to retain subscribers, one of the major pay-TV operators in the U.K. has entered into an agreement with world's leading Internet TV network in the U.S., Netflix (NFLX), earlier this month. For the first time, the deal will bring an internet TV network to a pay-TV platform.
A meaningful deal with a pay TV operator
Recently, Netflix entered into a deal with Virgin Media (VMED), which was acquired by Liberty Global (LBTYA), earlier this year. Under this deal, Virgin Media's TiVo set top box users will have access to Netflix content through its app, which has been enabled in the set top box. This will help Netflix expand its subscriber base and footprint in the Europe. Immediately after the deal, Virgin Media tested this facility with around 40,000 users through its set top boxes in the U.K. If successful, Netflix's service will be available to Virgin Media's 1.7 million subscribers who use the TiVo set top box by end of this year.
Currently, Netflix subscribers who want to access its services on their television sets need a TV with built in Internet access or they must attach a separate device such as a tablet or a game console to their set-top box. By enabling the Netflix app on the set top box, it is easier for subscribers to access Netflix content and switch back to programs provided by Virgin whenever they wish. Virgin's subscribers who want to watch Netflix content will have to login through the application by using their user-name and password. Even if they are not a subscriber, they can sign up through the app. Subscribers billing process will be associated with Netflix, not the cable operator.
Also, if the testing is successful, Netflix can win deals that will boost its business in the international market. This will help the company expand in the international market and add more subscribers, which will lower its high content cost.
The deal can help the company to stay ahead of its competitor
The deal with Virgin Media will help Netflix stay ahead of Amazon's (AMZN) LOVEFiLM. Both have an excellent library of content. Let's find out which company offers better services and fits best in terms of value.
If we compare in terms of both shows, then Netflix is worth considering. Let's look at the top 50 shows in the U.K., which are listed on Internet Movie Database, or IMDB, an online database of information related to movies and television series. Netflix offers 17 top rated shows such as House of Cards, Hemlock Grove, Arrested Development, Orange is the New Black, and hit series like Breaking Bad, etc.; on the contrary, LOVEFiLM offers 14 shows.
In terms of movies, Netflix again seems to be a better performer compared to LOVEFiLM. Netflix offer classic hits such as The Shawshank Redemption, The Godfather part 1, Forrest Gump, etc.
When it comes to apps, Netflix and LOVEFiLM's are available on:
Wii and Wii U
Android, iOS and Windows Phone
Apple TV and other smart TVs by LG, Samsung, and Sony
As shown in the table LOVEFiLM experiences device limitations, making Netflix a better performer available on almost all devices.
In terms of streaming quality, both Netflix and LOVEFiLM offer HD streaming, but depending on devices, they differ in terms of maximum resolution. Netflix offers super HD streaming on a wide range of devices, including the Apple TV, PlayStation 3, Roku, and Nintendo Wii U. All of Netflix's content isn't available on this resolution as it depends on TV shows or movies that have the 'Super HD' logo on the cover. On the contrary, LOVEFiLM subscribers can enjoy the 1080p streaming on their desktop or an 8.9 inch Kindle Fire HD tablet, everything else shows in 720p.
Both offer one month free trials. When it comes to price, LOVEFiLM is available to subscribers at around $7.98 a month and Netflix is slightly more expensive at $9.58 a month. Subscribers definitely won't mind spending $2 extra if they are offered better streaming quality and content.
Considering all aspects, Netflix is best placed in terms of value. It has a better offering and is available on more devices than Amazon's LOVEFiLM.
Increase in subscribers to drive in revenue
Netflix's domestic streaming revenue was up 26% year over year to $671 million in the second quarter of this year. The growth represents an increased number of subscribers. The company reported net addition of around 630,000 subscribers for a total of 29.81 million, higher than net additions of 528,000 in the previous year. Its original content like House Of Cards, Arrested Development, and Hemlock Grove are gaining popularity among subscribers. Recently, the shows received 14 Emmy nominations. This is the first time an Internet TV show was nominated for the Emmy awards. With this success, Netflix has ordered a second season of Hemlock Grove and plans to order a fifth season of Arrested Development.
We believe that the success of its original content will help Netflix gain more subscribers by end of this year and generate higher revenue from its domestic streaming segment. The company should reach 30.90 million subscribers by the third quarter of this year.
In the previous year, the company's domestic streaming segment reported revenue growth around 24%. Assuming the growth to remain constant, we estimate revenue of $7.30 billion for this year. We expect the success of its original content will translate into significant development and growth for Netflix.
The deal with Virgin Media will bring growth prospects that will help it seek similar international deals. This will help Netflix boost its international business and generate higher revenue. The company is well placed over Amazon's LOVEFiLM in terms of price, offerings, and content in the U.K. The company generates more than 60% of its revenue from domestic streaming. We expect the original content to continue to drive higher revenue in the coming years. We expect the two fundamentals to bring meaningful growth to the company. Currently, Netflix is trailing at a PE of 382.49 and a forward PE of 92.23, which depicts that the company has a high growth potential in the future with an expected EPS of $3.33 for fiscal year 2014. These fundamentals and valuation make the stock relatively attractive for investors.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.