Is Netflix Ready for a Duel With Google?

Includes: DISH, GOOG, NFLX
by: SA Editor Rocco Pendola

It's unclear exactly what's going on at Netflix (NASDAQ:NFLX) these days. As usual, the company remains mum on most aspects of its ever-evolving business, particularly concerns over its content acquisition spending spree. And just the other day, Herb Greenberg of CNBC tweeted something that has gone under the radar: Deborah Crawford, the company's VP of Investor Relations, is out.

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I have no illusions of grandeur (well, maybe once in a while), but I did find it ironic that the end of Crawford's tenure coincided with an article I wrote calling Netflix out for its less-than-transparent and less-than-investor/analyst-friendly conference call format.

The bottom line in the larger scheme of things: Investor relations at Netflix needs a bit of work. Most likely, however, Crawford just wants time to enjoy life and reap the fruits of her Netflix labor. It's also possible that she's taking the fall for her own or somebody else's poor decisions. In any case, it's no surprise that Netflix has no comment. So far, it hasn't even told who will read the script with CEO Reed Hastings and CFO David Wells on the company's April 25 conference call, which was, interestingly, pushed back a few days.

Part of the reason for the recent surge in bearishness towards NFLX involves moves by DISH Network (NASDAQ:DISH) and Google (NASDAQ:GOOG). Of course, DISH bought Blockbuster (BBI) the other day, triggering concerns that it might ramp up its streaming efforts and provide yet more competition for Netflix.

The bigger challenge to Netflix, however, comes from Google. The company is in the middle of retooling YouTube and, reportedly, set to take on Netflix in the streaming of online content. As The Wall Street Journal notes today, an analyst at Wedge Partners thinks Netflix has lots to fear:

Traffic volumes aside, perhaps the most significant advantage that GOOG has in competition with NFLX is the widespread distribution of the YouTube streaming application on consumer devices such as the iPhone, Apple TV, Android, BD Players, IP-enabled TVs, etc. Unlike other streaming video competitors, YouTube is on nearly every device platform on which NFLX is running today. We believe that it is this platform distribution in particular that gives GOOG a significant leg up on the competition vs. NFLX.

The analyst, Martin Pyykkonen, also pointed out something that deserves further consideration. He notes that content providers will welcome another bidder into the content acquisition market. This is an understatement. Simply put, Netflix is unprepared to compete with the likes of Google. In a battle of the bankrolls the company has absolutely no chance of winning. In fact, if Google is serious and intends to buy up content for its YouTube venture aggressively, Hastings will have little choice but to knock on Larry Page's door and ask for mercy or a lifeline, or completely change course.

According to Yahoo Finance, Google has about $35 billion in cash. Netflix has a paltry $351 million (and I rounded up generously). It's not just about cash. Unlike Netflix, Google's assets are worth something. They don't consist solely of "content," old DVDs, and warehouses. Just as Walmart (NYSE:WMT), Target (NYSE:TGT), and (NASDAQ:AMZN) effectively combined to stomp out every Mom and Pop shop, toy store, and bookstore east of San Francisco, Google could literally put Netflix out of business in an instant. And why shouldn't it?

From its position of power, Google can render Netflix extinct. If Google starts a bidding war, it might be more than willing to overpay for content simply to help YouTube take the next step in its evolution and cement itself as more than a site for uploads of concert bootlegs and your kid singing Rolling Stones' songs.

Without a buyout from Google, It might be wise of Netflix to take a step back, consider its content play a battle lost before it really begins, phone up Coinstar (NASDAQ:CSTR) to talk partnership, and replace its focus on all things DVD rental.

Disclosure: I am short NFLX via a long position in put options.