Netflix Is Cooked; Get Out of Amazon and Coinstar As Well

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 |  Includes: AMZN, NFLX, OUTR
by: Karl Denninger

Looks like the rumors are true:

[Click to enlarge]

Put a fork in Netflix (NASDAQ:NFLX); it's cooked.

Here's the problem: You get more than the streaming (which incidentally I counted up at ~1,300 movies alone on Amazon (NASDAQ:AMZN) this morning ... all of which you can look at before choosing to buy its "Prime" membership) plus you get two-day shipping included on anything you buy from Amazon.

The Prime membership price isn't changing; this is just another "fringe" benefit. And it will stream to a huge number of devices -- arguably more than Netflix covers.

For Prime members, they just lost all reason to have a Netflix subscription. That's going to hurt -- a lot. And for non-members, you're now paying $6.58/month, or less than Netflix is charging, for the streaming video service ... and the two-day shipping on Amazon purchases is included at no cost.

That's how consumers are going to see it.

Redbox (CSTR) has announced its intent to offer a similar service.

The race to the bottom in margins is now in full force in this space. The entirety of the business model for Netflix and everyone else in terms of being able to make money on these offerings, and the valuations in their stock prices, was entirely reliant on that not happening. Add to this the pressures that will come from the CDN and ISP side, and you got trouble.

Now look at the deferred expense issues with Netflix; what I see is big trouble.

Unfortunately, this doesn't make Amazon a buy. When a market becomes filled with people who are willing to undercut one another by 30-50% to make the sale, you've moved from a growth model to one of cannibalization. This is not where M&A occurs (which will be what the crooners will try to sell you), it's where the sharks start eating each other, having insufficient food available to sate themselves by other means.

Stay away from all of these companies. This is a highly-destructive cycle that is likely to lead to severe margin compression for all of these firms. If I had to bet on someone surviving this, it would be Amazon, with Redbox/Coinstar and Netflix being the potential zeros ... but even so, it's going to hurt Amazon's margins as well.

Nobody "wins" these wars. If you have positions in these companies, get the hell out of them while the getting is good.