It was inevitable that Netflix (NFLX) would raise prices. The shock for this investor was that it happened sooner than expected. DVDs are on their way out, soon to be entirely replaced by streaming. The winners in the short-to-medium term will be the companies that can most afford to deliver the premium content offered by the studios. The studios will charge a premium as well. Make no mistake: Whoever ponies up the most money will get the content.
My thesis regarding Netflix is simple: It's going to have to generate an awful lot of cash to keep the content it has and even more to improve upon it. The problem is that while Netflix is essentially the primary name in streaming at the moment, this is not going to be the case for long, nor will it be able to continue to compete on price. The reason is that there are three other obvious competitors that have far deeper pockets. Even worse, streaming technology will soon become a commodity just like DVDs and DVD players.
Amazon (AMZN) sits on $8.7 billion in cash and generate $3 billion annually in free cash flow. All the new televisions are compatible to stream its service in HD. All it takes is a desire by Amazon to move into content streaming in a bigger way. Apple (AAPL) has $26 billion in cash on hand, and generates well over $10 billion in free cash flow annually. The iTunes interface works great, and again, it's just a question of how heavily Apple wants to muscle in. And I don't even need to mention Google's (GOOG) balance sheet, do I?
How long before these players start to muscle aside Netflix, with its $350 million of cash on hand and under $300 million in free cash flow annually? This is the same Netflix that needs to come up with hundreds of millions just to keep EPIX content. In the meantime, the company has overpaid for original content, a 26-episode TV series starring Kevin Spacey. It put up $100 million for it. How many subscribers will that really attract?
Netflix is expanding overseas and most of its subscribers will absorb the price bump. But sooner or later, Netflix's competitors are going to sweep it aside as they back up their cash trucks to the studio gates and steal content away from Netflix. I think Netflix is a short.