Netflix (NFLX) has seen tremendous subscriber growth in recent years owing to the success of its unique business model of renting DVDs and providing film content online. One of Netflix’s challenges is the threat of greater competition from internet service providers (ISPs) like Comcast (CMCSA) and Time Warner Cable (TWC) who are strengthening their own online video-on-demand (VoD) services.
With consumers shifting to web viewing, Netflix’s future depends on its ability to provide extensive and quality content via streaming. Below we discuss the possible advantages of ISPs in the online streaming market and how they have the potential to negatively impact Netflix’s stock by hampering the company’s subscriber growth.
1) ISPs can leverage huge subscriber base to strike attractive deals with content owners
ISPs like Comcast and Time Warner Cable have a huge customer base that subscribes to their cable TV and internet services. Comcast currently boasts of over 23 million TV subscribers and close to 16 million internet subscribers. Although Netflix’s subscribers are increasing at a rapid pace, the company does not have as many subscribers as Comcast and only slightly more subscribers than the 10 million internet subscriber we expect Time Warner Cable to have in 2010.
Since ISPs typically acquire content in bulk, they can offer lucrative deals to content owners and strengthen their online VoD offerings. In contrast, Netflix’s content acquisition is limited and the company has faced clashes with studios like Fox and Universal in the past with regards to content acquisition.
2) “TV everywhere” initiative from ISPs competes directly with Netflix
Cable operators (Comcast, Time Warner Cable) have started TV Everywhere, an initiative that aims to provide access to free and on-demand content online to subscribers. The content will be available for free to consumers who subscribe to their cable TV services. This directly competes with Netflix’s growing online streaming offering and with better content, cable operators can significantly weaken Netflix’s value proposition.
Slower Subscriber Growth Can Negatively Affect Netflix’s Stock By 30%
We currently forecast an average subscriber growth rate of about 17% for Netflix, and expect its subscriber base to reach close to 36 million by the end of the Trefis forecast period.
However, rising competition from internet service providers for online video offerings can slow down Netflix’s growth rate by an average of 10%. This could result in a downside of about 30% to Netflix’s stock.
You can modify our forecast above to see how Netflix’s stock will be impacted if its number of subscribers declines instead of increasing as we forecast.