Netflix Is Vulnerable To Future Competition From Those With Own Device Platforms

Oct.27.13 | About: Netflix, Inc. (NFLX)

Netflix (NASDAQ:NFLX) has certainly made a name for itself as today's go-to streaming service for many consumers, but its video content distribution business is not without challenges in terms of both ongoing content acquisitions and potential changes of future content delivery mechanism. All online content distributors face similar issues of how to acquire and provide better content so to sign up more users. But Netflix, without a streaming device of its own, is particularly vulnerable when securing reliable distribution channels for its content delivery. As competition in online video streaming continues to evolve, competitors such as Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), or even Microsoft (OTCQB:MFST), may all push ahead over time with their own streaming services. Equipped with a mobile streaming platform of their own, these companies can pose serious threats to Netflix whose content partly relies on competitors' devices to reach end users.

Some may not be fully aware that Netflix's content collection available for streaming is actually rather limited when compared to its entire DVD database. A browse of the sample DVD titles on Netflix's home page helped produce a streaming-availability number of less than 10 percent out of the total titles displayed. To stay with its $7.99 low-price strategy, Netflix simply can't afford to purchase more streaming rights to an extended content collection because studios demand higher pay rates for online streaming than buying and renting out DVDs. But consumer shift to streaming videos online has mostly worked out in Netflix's favor. Even though Netflix has a much smaller pool of content available for streaming out of its large DVD collections, most users have so far placed the convenience of having content delivered online over concerns about its limited streaming content choices.

But such a situation may not be sustainable as over time, users can become unsatisfied when they finally realize that many of their favorite movies and TV shows are not available for streaming. One potential solution would be to increase streaming subscription fees to cover the extra costs of purchasing expensive streaming rights. Services from others charge higher rates on a per-streaming basis offering greater content availability. Google Play, for example, can charge all the way up to $10.99 per streaming for newly released titles on high definition. But this is not a strategy that fits well with Netflix's goal of building a large streaming subscription base at a competitive price. To grow its membership, Netflix has to find other means to show off its content and keep members entertained. Along the way, there comes original content creation.

Consumers and investors all seem excited about this new development, and talks of Netflix becoming another HBO or Showtime have started streaming in. But some are quick to forget that at its core, Netflix is a content distribution company, and the occasional content productions are only a means to help shore up its subscriptions. Users come to Netflix mostly to watch their favorite movies and TV shows. While original content may stir up additional interests among subscribers now and then, in the long run, Netflix has to be able to negotiate better terms with content providers to make more titles available for streaming. Too much focus on content creation or attempting to even transform into a content company can only add uncertainties about Netflix's future.

Taking its eye off its core content distributions may come as something costly later to the future wellbeing of the company. While Netflix needs to be concerned about ongoing content acquisitions to keep customers happy about what they can watch, they must also take a strategic view on making sure of reliable distribution channels. Content availability is a seeming matter of service quality, but any inconvenience or even breakdown of a means of streaming becomes a direct concern of company survival. Netflix's planned teaming up with cable companies to have its service configured into a cable set-top box seems to be a working tactic aimed at securing another content delivery platform. But in comparison, Amazon's intention to build a mobile device of its own to be used by users of its Prime service feels more like a strategic move designed to create a proprietary streaming platform for its own Instant Video offering.

Of course, Netflix currently can be carried without restrictions on everything from Amazon's Kindle to all other devices from those like Google, Apple and Microsoft. But as these companies start seriously offering their own video streaming services, it's not certain how the issue of sharing one's own platform with competitors may arise. At the least, the default choice of streaming would be the service from the owner of a particular device platform. For example, Google Play would show up first on every Android device. Without a device platform of its own and having to run its streaming service on others' platforms, Netflix would see diminished presence to device users, assuming rules prevent owners of a streaming platform from totally denying a competitor's access. Should such developments come to light in the future, Netflix would be in a much disadvantaged position if it had never thought about a Netflix-branded streaming device.

While Netflix may continue to perform well under the streaming business' current environment, it has yet to make some strategic moves to help solidify and secure its position in the future. Netflix investors will be caught by surprise if they fail to foresee what can change in the streaming business in the future. What Netflix needs is to have something compelling and long lasting to keep users signed up, and a device of its own will offer exactly such an allure.

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.