Does Netflix Really Have Any Competitors?

Includes: GOOG, NFLX
by: Rob Fagen

I saw an interesting article about a deal between Google (NASDAQ:GOOG) and Weinstein Thursday. A deal was closed that allowed YouTube to distribute some Weinstein movies on a PPV basis. It led me to believe that there really isn't as much competitive threat to Netflix (NASDAQ:NFLX) as many folks seem to keep harping about.

Looking at the data about usage, we can see that the total number of paid viewings of the catalog hasn't broken out of the four digit range since last November (which is the earliest that this deal was potentially consummated).

The reason appears clear: consumers are being asked to pay several dollars for a single viewing of a single back-catalog (2004-2007) movie. Compare this with the tens of thousands of long tail titles available through Netflix for less than the cost of three movies via YouTube.

A lot of people don't seem to understand that the digital delivery space is segmented into three major areas:
1. Electronic Sell Through (think iTunes store to an Apple (NASDAQ:AAPL) TV)
2. Pay Per View (think YouTube or cable PPV)
3. Subscription

Nobody else is doing the subscription model at the scale and low price point that Netflix is doing it. Everyone else is playing in the other two segments, which have *never* gained much traction in the 20+ years that they've been available.

Consumers love to consume, and Netflix's buffet is the best value out there. Complaints about lousy content are focused on looking for something new or a blockbuster. The recommendation technology that Netflix has been building and improving for most of a decade is the secret weapon that gives customers a satisfying experience at a low cost and also makes studios happy by giving them a way to monetize their back catalog in a profitable way.

Nobody other than Netflix is doing that today, and I don't think that there's anyone else out there that's currently looking to do it that way. Even if they did decide to, it would take a long while for them to scale to the same level as Netflix and to build the systems that would do it efficiently and effectively.

Disclosure: I am long NFLX. I have some covered calls I've written against part of my NFLX position.