by Jennifer James
Netflix (NFLX) is a company that provides movie delivery service through instant online streaming and home DVD mailing. Netflix's business scheme changed significantly in 2011 when the company increased the price of its popular instant streaming/DVD rental package. This change resulted in a significant loss in revenue as customers either dropped the carrier entirely or chose to only keep its instant streaming feature. Netflix's stock trades at $104 per share.
Increasing pressure to add more variety in online streaming content from competitors such as Redbox's parent company Coinstar (CSTR) in collaboration with Verizon (VZ) for instant video streaming, Amazon (AMZN) and its Instant Video service, and cable company Comcast (CMCSA) also negatively affect Netflix's stock price.
However, Netflix also announced that it invested in original programming and exclusive instant streaming releases of new movies from the Weinstein Company. I believe that Netflix's share price will rise from its recent lows as the company moves towards new programming features for customers. The key for this company is content, and with great content its margins can expand because consumers are willing to pay a premium for it.
A major reason for Netflix's lowered stock price is the growth of its major competitors: Redbox (owned by the coin-sorting vending machine company Coinstar), Amazon, Comcast, and premium cable companies looking to expand online streaming services such as HBO. As a Netflix customer, I notice that Netflix's selection of instant watch material is limited compared to other online video streaming services. Although Netflix has over 140,000 DVD titles available by mail, its streaming service only amounts to 60,000 videos.
Film and television studios limit the company's streaming video content. The studios know that Netflix currently has 23 million streaming subscribers out of its total 26 million subscribers. In order to profit from Netflix's large customer base, film and TV studios increase their online streaming fees based on royalties and copyright law. However, after the 2011 customer backlash from its almost 60% price increase, Netflix is hesitant to increase its price to accommodate increasing streaming fees from film and TV studios. As a result, Netflix competes with other DVD and online movie streaming providers that may offer customers more attractive pricing or greater convenience than the traditional Netflix DVD, streaming, or combination package.
The Coinstar company actually experienced an increase in profits from its DVD rental kiosks. In fact, Redbox experienced a profit increase in spite of raising its service price from $1 to $1.20 for DVD rental. Shares for Coinstar's stock recently rose compared to the decrease in value for Netflix stock. In my opinion, Redbox remains popular among consumers because it enables instant access to DVD rentals as soon as movies are released on DVD. Redbox's instant delivery of DVDs is unhindered by blocks on streaming rights.
Another competitor for instant streaming is Amazon, which offers instant video streaming through an annual Amazon Prime premium membership at $79 or $2-$5 per individual TV episode or movie. Although factors not directly related to instant streaming recently led to a "neutral" rating for Amazon stock, reports of inflation of Amazon's "17,000 movies and TV shows" claims for streaming choices may affect consumer choice for streaming platforms. Again, I feel that Amazon offers another instant streaming service that is not affected by streaming rights like Netflix. Unlike Netflix, Amazon also offers instant content closer to DVD release dates.
Finally, Comcast proved itself as a major competitor for Netflix through on-demand TV programs and movies. Sales for the past five years rose 17% while earnings in the future are expected to grow as well. With projected, continued financial growth, Comcast views itself as a direct competitor with Netflix in terms of securing customers for instant streaming video content. Unlike Netflix, as a result of the 2011 merger between NBC-Universal and Comcast, Comcast subscribers have instant access to NBC network and affiliated programming and Universal films that are not subject to streaming restrictions (although some NBC shows such as The Office are readily available on Netflix). HBO took a similar path in offering its customers exclusive online streaming access to its programming through HBO GO. HBO chose to block Netflix from access to streaming rights. Instead, the premium cable company directly offers online streaming to its customers through its HBO GO online streaming service.
Although many analysts project a bleak fiscal year for Netflix, I believe that the company's current low stock price and its investment in future programming create an investment opportunity going into 2013. Netflix as a company established the business model for incorporating home DVD viewing with the Internet, and it adapted that model as viewing trends changed through its "Watch Instantly" streaming feature. In spite of its drastic changes to pricing and services offered for DVD rental and online streaming, Netflix may be able to incorporate a slight price change to overcome boundaries from film and TV studio streaming rights price increases.
The example of Redbox's revenue and demand increase after a service charge increase could persuade Netflix to change its pricing in order to offer its customers more programming variety. Additionally, Netflix pledged to pay $4 billion in licensing fees for access to instant, online streaming content. I feel that these factors will positively influence investors to either maintain or buy stock in Netflix in order to participate in the company's future growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.