The year is 1847 and Reed Hastings, CEO of Netflix (NFLX), is out in California mining gold. It oozes to the surface and efficiently he picks up the nuggets, re-investing profits into new mining equipment. Wiping the sweat off his brow, he looks around the valley below on this hot day. It's virtually untouched, as few understand what he does, and how much wealth there is hidden in these hills.
Fast forward s few years later, the Valley is now called Silicon, and huge titans of the industry are moving in. Amazon (AMZN), Google (GOOG), Apple (AAPL), Verizon (VZ), Coinstar (CSTR), Time Warner (TWX), Comcast (CMCSA), and Walmart (WMT) all want a piece of Netflix's profits. Reed Hastings has a dilemma on his hands. Suddenly machinery (content) is costing a tremendous amount more as rivals are bidding up the prices of a seemingly limited amount of the tools needed to extract gold.
Consumer loyalty to the brand is almost farcical, as consumers only care about what they can watch, not where. Changing cinemas is only a click away. As of now, Netflix is in pole position in the respect that they offer the best catalog of streaming video content, knowing the DVD will be nearly obsolete in a few years. You have to give Reed Hastings (CEO) credit for understanding this, the challenge is, in doing so, he moved away from the material wealth still mined from the technologically un-savvy, and gave CoinStar (Redbox) a seeming default monopoly in DVD rentals.
This opened the door for Verizon, developing its own streaming service, to partner with Coinstar, and although details are sketchy, Redbox will likely be fulfilling the DVD demand, allowing the venture to avoid the biggest expense Netflix had with DVD's, postage, as consumers fulfill their request at the local Redbox vending machine rather than wait for the mail. Meanwhile Verizon will offer the streaming using their vast network of internet pipes.
Amazon is offering their streaming video service PLUS free 2 day shipping on all your Amazon orders, for $79 a year for subscribing to "Amazon Prime." Here Netflix has an advantage because Amazon's content is dated, and generally mediocre, but Amazon is actively pursuing new deals, and new content, in its with overall goal to add more consumers to the ranks who purchasing through its online store. I personally just upgraded to Prime because of the free two day shipping, and despite the disparity in content with Netflix, there is enough there to satiate the little amount of time I have to watch videos, at least for a few months. If they add more content, then longer. I am no longer a Netflix subscriber. (Click here for a video as I quickly evaluate the competition facing Netflix.)
Comcast recently introduced Streampix, a $4.99 service for current subscribers to the cable service, aimed at recouping dual Comcast/ Netflix customers back solely to the company's own platform with the cheaper rate, as well as to discourage cord cutting.
Google is already in the process of investing $100 million into new content for their brand new YouTube channels, likely to support the future Google TV offerings.
Time Warner has HBO, and their HBOGo streaming service, which has never allowed its content to be streamed by anyone else. You must be a subscriber to the service. Hastings identified HBO as its biggest competitor, and is in fact trying to model the cable channel by producing its own new content, which is an expensive proposition fraught with high risk.
The truth: this is the new golden age for content providers with the sudden demand for new content, one that four years ago those of us living in Hollywood thought would never again arrive, as voyeur TV (reality shows) were in vogue. My honest best guess, we're going to have a content bubble raising the price of shows for a period of time. This does not bode well for Netflix, with far shallower pockets than its competitors in its quest to develop its own shows. (check out "Devlin Made Me Do It" on YouTube- seven segments to the entire episode)
Here's the bottom line, there will be a HUGE wave of competition headed Netflix's way.
Netflix's margins are 11% for streaming video. Following the negative Quixster debacle, any price raise is likely to be met by a collective public groan, and more outrage from the public, and a sudden vaporization of clients who believe the company is not treating them kindly.
With an expected loss in the upcoming quarterly reports, I anticipate a descent in the price of the stock, especially if the number of new and recouped suscribers fall below expectations.
With the company trading at 24 times earnings, I wouldn't be exiting my short before it fell down to a more manageable level of 15 times earnings, or around $65 a share. At this price it might become more attractive to potential buyer.
As much as I've enjoyed the company's services, I myself am no longer a paying member, and I can't help but think others will follow suit. I anticipate Netflix either being bought out, or worth far less than it is today.
Disclosure: I am long GOOG and I am short NFLX