Netflix: The Quest for Original Content

Mar.18.11 | About: Netflix, Inc. (NFLX)

By Karen Schwartz

Netflix (NASDAQ:NFLX) is reportedly in the process of buying rights to distribute a 26-episode show called "House of Cards." Reportedly having outbid HBO and AMC for the show, this would represent a potentially significant shift into original programming.

Wedbush Morgan Securities’ Michael Pachter applauded the move, saying the company needed to spend "$1 billion or so on content, so 10% of their costs on original programming is an appropriate risk to take and see if it works." They need to take market share from HBO/Showtime to keep growing, he pointed out, adding that "the biggest obstacle to overcoming those two is the lack of original programming. It might make sense for Netflix to try to compete head on."

Goldman Sachs’ Ingrid Chung upgraded Netflix to "Buy" from "Neutral" earlier this week, and raised her price target on the stock $300 from $210. This is well above the median target of $225 in our Mar 3 Prognosis on the company. She thinks Netflix has enough users and momentum to make it near impossible for any rivals to enter the video streaming space and compete any time soon

But while she doesn’t see any short term impact of Facebook offering movies, Chung notes that down the line, Facebook could pose a problem for the online rental service. "The ‘wisdom of friends’ could be a bigger driver of movie viewership than the ‘wisdom of crowds,’" she is quoted as noting.

Forrester Research’s Elizabeth Shaw flags Facebook’s streaming as a potential integration advantage. "This is exactly what Netflix and others haven’t been able to do very well – integrate video with social."

But analyst concern to the point seems metered, with some considering it a non-issue. Last week Pacific Crest’s Andy Hargreaves reiterated his "Outperform" rating on Netflix shares, saying its streaming video "competitive advantages are intact." He suggests that he believes Netflix and Facebook are working to "tightly integrate Netflix" in a way that benefits both.

And Lazard’s Barton Crockett calls the Warner Bros (NYSE:TWX) offering a "far cry" from a Facebook subscription service; subscription based movie services have been more popular than online pay-per-view ones, he is quoted as noting recently to investors.

Meanwhile, Hudson Square Research’s Daniel Ernst said it’s a portfolio of shows that will help Netflix grow.

"Something like that is never effective as a one-off; it’s only effective in scale, unless that one-off happens to be ‘The Sopranos,’ which is rare."

One thing is clear: Netflix is not standing still and is cementing its reputation as a disruptor, perhaps looking over its shoulder at low cost rental services like Zediva.