Whether Netflix (NFLX) and its stock will flame out again, or rise like the Phoenix from the ashes dumped upon it by the majority of analysts who shout "SELL, SELL, SELL," and thereupon soar to former heights, and beyond. That is the question for those of us who hold its stock and those who would. Netflix's 2011 decline was caused mostly by the market perception that its management had made a very bad decision: to bifurcate delivery into streaming and DVD postal delivery, and charge separately for each, resulting in an approximate 60% price increase. The perception that this was a bad decision was reinforced by a rapid, huge exodus as 800,000 Netflix subscribers peeled out from the approximate 35 million. The perception of bad management judgment was confirmed when management decided to staunch the exodus by reversing its original decision to bifurcate streaming and postal delivery.
Since then Netflix has been recovering its subscription base and consequent cash flow, reflecting the trend that management expected in making its supposedly "bad" decision, one that I believe will cause Netflix and its stock to rise to former levels and make it an investment rather than a mere trade, which is what I perceived it to be when I viewed it as nothing more than another Blockbuster. Meanwhile, the blood let last year did bring Netflix to bay, as well its hounding competitors, nipping at its heels, but not yet its haunches.
Apart from my incentive as a stockholder, I became a Netflix subscriber because of its streaming. The DVD-by-mail subscription held no appeal, albeit an improvement over my every Blockbuster rendezvous where I had to browse rack upon rack physically at an out-of-the-way store, which had hours accommodating the employee sleep cycle, instead of net flicking any time I wanted at home for what I wanted and getting exactly that when I wanted it, taking into account only the three-day postal delivery delay, instead of having to settle on not exactly what had driven me to Blockbuster because all copies were gone.
Selection of the DVD-by-mail may be the same, but streaming is instantaneous, and the delivery cost of streaming is minuscule compared with the cost of delivery by mail. This is a much better business model than Blockbuster, even blockbuster by mail, which is how I had thought of Netflix originally.
An interesting additional pathway unique to Netflix, because of its preference and proclivities software, is the offering of excellent television series and programs that do not survive on TV because their appeal is to special interests and tastes not shared by the general public. Will Netflix be able to monetize promising shows that can't survive on TV because of Netflix' deep knowledge of customer preferences? I believe so. I believe that this is the great advantage of flexible internet delivery over less flexible traditional media such as television and newspapers, even magazines, which cater more to special interests.
Disadvantages and Risks
Netflix will not have a lock on its subscription offerings. Anyone with access to TV programming and the Internet will have a similar key--all the major TV stations, for example, Cable TV and its companion DVR: Comcast (CMCSA) - and eventually the actual advantage of stored subscriber preference and proclivity as well.
Indeed, substantial impediments to Netflix gaining over all and going forever upward are availability of product to stream and the possibility of more innovative or well-heeled competitors. At least for now, these are not serious problems, although not everything I want is available by streaming and Netflix requires me to actually buy a DVD to access a movie I want merely to rent via my monthly subscription!
Additionally, Netflix access to Starz has been terminated. Hollywood has signed up with Wal-Mart (WMT) to permit streaming of stored DVDs purchased at Wal-Mart stores. Sony (SNE), Viacom's (VIA) Paramount, Comcast's Universal, Time Warner's (TWX) Warner Bros. and News Corporation's (NWSA) 20th Century Fox are reported to be parties to Wal-Mart's consortium. The defect of this model is that the product must be purchased and stored rather than merely rented to be streamed. Verizon (VZ) with Redbox and Dish Network (DISH) with Blockbuster overcome this defect by permitting rental per streamed product. Comcast's Infinity has a combination arrangement, which most closely parallels Netflix. It has both free and rental movies on demand, the latter being the most popular, current movies available. Netflix appears superior to Comcast at the moment because its subscription covers current, most popular available movies without additional charge, excluding that seemingly ubiquitous, and therefore annoying "buy DVD only" availability. Presumably, this reflects the realities of product access rather than the company's overall subscription model.
Another third problem is toll-trolling, not now, but possibly soon, by Internet Service Providers (ISPs), which make the internet accessible to consumers. Like newspapers and television, ISPs have depended mainly on advertising for their revenue. Although, their advertising can be better targeted to those actually interested, therefore not as likely to be circumvented by the consumer, and therefore more valuable, ISPs could depend more on the simple act of providing access. Although precluding access to such as Netflix is probably a violation of several federal laws, ISPs might charge so much for access as to take the profit out of streaming.
Specifically, in its Annual Report, Netflix lists as its competition multichannel video programming distributors with free TV Everywhere applications such as HBO GO and Showtime Anytime in the U.S., and SkyGo or BBC iPlayer in the UK. It also lists video-on-demand content, including cable providers, such as Time Warner and Comcast, direct broadcast satellite providers, such as DIRECTV and Echostar, and telecommunication providers such as AT&T (T) and Verizon. "Over-the-top" Internet movie and TV content providers are also included, such as Apple's iTunes, Amazon.com's Prime Video, Hulu.com and Hulu Plus, LOVEFiLM and Google's YouTube. DVD rental outlets and kiosk services, such as Blockbuster and Redbox, and entertainment video retailers, such as Best Buy (BBY), Wal-Mart and Amazon.com (AMZN) are also a formidable and diverse array.
If history is any measure, not all will survive. But of them all, I believe that Netflix has the most survivable model. That is no guarantee. Accident, happenstance, or the next great thing may dictate otherwise. After all, the buggy whip was also the most survivable model at one time, and it has survived to this day, but only in a very narrow niche very few visit, not one that warrants a viable market presence, stock, or investor interest. My opinion is that Netflix will be one of the survivors. Netflix management has been chastised and whipped into shape by its PR gaffe. It won't likely misstep so massively again. Netflix will prevail in its own niche, which will continue to be visited by many, subscribers and investors alike. My whispered response to that majority of analysts I quoted at the outset is "buy, buy, buy Netflix!"
Disclosure: I am long NFLX.