There is fierce competition in the home movie delivery and streaming business. Netflix (NFLX) is the genius company that made the latest movies available to millions of at home movie watchers, and enabled the convenience of movie watching on laptops and notebooks. Thanks to Netflix's dvd-by-mail concept, those who do not have the time to watch blockbuster movies on the big screen can now have their own copies for lifetime use.
However, while Neflix has had quite the run, I believe the company has made its money and will be the worst performer of the home movie sector in the coming quarters. Netflix has steered away from its iconic mail home-delivery DVD business and migrated to the more competitive and lower profit margin online movie streaming business. I believe Netflix will also be a poor performer this year, because it lacks the internet video and movie streaming infrastructure that many of its competitors already have.
Netflix made a terrible mistake when it went ahead to deal directly with customers by switching their movie business from the mail-in DVD format to the direct movie streaming business. Analysts have scolded Netflix for this switch because they saw profit margin compression. Netflix's mail version created much higher profit margins for the company versus the new, razor thin profit margin movie streaming avenue. Moreover, the plan created a customer service nightmare for Netflix, because it lost over 800,000 customers almost overnight.
Moreover, there is a price war with Comcast (CMCSA) over streaming movie services. Comcast has begun offering its customers movies for just $4.99, compared to Netflix's $7.99 price tag. This price war created an almost instant slide in Netflix's shares by almost 4% last month. In addition to the price war Comcast has created, it has a broadband advantage. Because Comcast is a cable company, it has the ability to offer broadband and charge for it. Netflix has no such 'iron in the fire' to compete with Comcast. Comcast's broadband advantage enables cable companies like Comcast to offer streaming movie package bundles at cheaper prices. These prices include movie streaming services with standard internet or television services. This broadband quandary poses even more competition to Netflix's bottom line, because Netflix cannot turn a profit if it wants to develop broadband infrastructure. Netflix has the weaker business model, because it charges more for the same service - this will scare customers away. Also, because it is experiencing lower profit margins, whatever customers it does keep or attract, it will have a lower volume of smaller profit margins.
Compared to Netflix, Amazon (AMZN) has also has a better movie rental business model. Amazon offers its movie service at a cheaper rate. Customers are able to purchase a one year subscription for only $79.99 per year. On a month to month basis, Amazon only charges $6.66 per month, compared to Netflix's $7.99 monthly fee. Moreover, Amazon gives its patrons a choice between video stream and two-day dvd mail delivery.
Amazon seems to have taken a page from Netflix's more profitable days and is poised to surpass Netflix. Amazon is also better positioned to grab a greater share of the mobile movie watching demographic. According to reports, Amazon has started offering its Kindle Fire users the ability to watch content free. This will allow Amazon to attract even more customers to its movie streaming service. It would also allow Amazon to convert free users into paying prime level customers, further helping it generate revenue. This is an ingenious plan, because it provides Amazon with a great marketing tool. It brings in more customers through a free product. Amazon, enticing customers through its free product, will ultimately reduce its advertising costs and eventually convert free customers into paying customers. This makes Amazon a better stock pick than Netflix in my book.
According to some analysts reports, Netflix can be seen as its own worst enemy. Netflix seems to be doing some very self-destrucive things to itself and makes its own case for being a poor performer. According to reports, Netflix sees itself more as a cable company. It has contracts with Disney (DIS), the CW, and even AMC for television programming for its streaming video business. However, Netflix is known primarily for its movies and is doing itself a great disservice. Because it is straying away from what most people know them for, mail DVD service, the company is losing its identity. Moreover, when Netflix increased its prices by two-thirds, it lost nearly 800,000 subscribers. Instead of trying to save face and come up with new prices, it refused to change and lost a huge customer service battle.
I believe the stock price has nowhere to go but down at this point. Through bad public relations and stale viewing choices, Netflix's customers felt they had nowhere else to go. For these reasons, I believe Netflix will perform poorly in the coming quarters. I recommend holding off on Netflix for now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.