Netflix (NASDAQ:NFLX) provides and sells subscription services for TV shows and movies, offering customers the choice of receiving DVDs by mail, or streaming its available content through various smart devices in the home. Formerly a popular, high-flying growth stock, peaking near $300 per share in July of 2011, the company and the stock have fallen on hard times, and it currently trades around $73 per share. As with all technology stocks, the questions for Netflix are trifold. First, how does it compare to peers? Second, when will its current way of doing business be replaced by the next best thing? Third, how will the company adapt to the changing landscape? Let's attempt to answer each of these questions, in turn.
Competition, a quick recap
The only direct, apples-to-apples, competition to Netflix is the former video store giant, Blockbuster, now owned by DISH Network (NASDAQ:DISH). Both DISH Network and Netflix offer not only streaming entertainment content, but also DVDs through the mail. The Blockbuster division of DISH Network offers the extra component of personally exchanging DVDs in the dwindling number of Blockbuster branded storefronts, but I don't expect that to be a lasting part of its business model due to unsustainably high overhead.
Coinstar (CSTR), the owner of the unmistakable self-serve DVD kiosks branded as Redbox, is a fringe competitor. Not offering streaming content, users of Redbox rent and return DVDs via roadside kiosks for $1 per day. For consumers that don't yet have a smart device capable of streaming content, Redbox is a viable alternative at the present time. Redbox, however, will need to increase its selection and begin offering streaming content in order to remain viable. They apparently know this too, announcing in February a partnership with Verizon Communications (NYSE:VZ) to begin a streaming partnership.
Other streaming services, such as Hulu Plus, co-owned by several major television networks, and Vudu, a division of Wal-Mart (NYSE:WMT) haven't yet established clear identities in the field.
Netflix versus the competition
Prior to September 1, 2011, when its stock was soaring, Netflix was the clear-cut winner in the home entertainment industry. Offering both unlimited DVDs by mail and unlimited streaming content for $9.99 per month, won Netflix vast consumer acclaim and subscriber counts. However, effective September 1, 2011, the company changed its pricing structure, splitting up the DVDs by mail and the online streaming into separate plans, each of which start at $7.99 per month. The minimum monthly expense to receive both DVDs by mail and streaming content from Netflix is now $15.98, an increase of 60% from a year ago. Exclamation point. This drastic price increase led to national headlines, sweeping customer discontent, and a cratering stock price. That's the bad news.
The good news, I believe, is that the tenets of Netflix, what originally made it a growth-stock superstar-no hassle mailing, user-friendly website, the largest selection (streaming or otherwise), and very competitive pricing-still hold true. It's still cheaper, for example, to stream unlimited from Netflix each month than Blockbuster, so don't get too caught up in the pricing hysteria. As of the time of this writing, in fact, I view Netflix as the "best of breed" in home entertainment subscription options.
The Industry: What's next? Out-Netflixing Netflix?
When Netflix burst onto the scene in the late 1990s, it introduced an entirely new way of delivering entertainment to the American household. No trips to the video store in the middle of a driving rain storm, no late fees for not returning forgotten-about discs that managed to disappear between the couch cushions. No gas money spent, no hassle, no fuss. It's a business model that, in only a few years, essentially made the local video store obsolete. And then its flagship DVD by mail program began to be replaced by online streaming, the latest season of your favorite TV show queued up on your screen at the push of a button, or four. Last year's pricing furor aside, Netflix adapted to this new technology more or less seamlessly, becoming the most widely used streaming entertainment option in the world.
But you have to ask yourself, what's next? I can envision a time in the not too distant future where cable and satellite television service providers allow access to a massive, if not quite unlimited, selection of on-demand streaming content for a monthly fee that will simply be added to your existing bill. No separate account to track, no hassle. This is already happening, to a degree, but the selection choices are nowhere near adequate to make a major dent in Netflix's subscriber base. If, however, that changes, cable providers like Verizon and satellite providers like DISH Network and DIRECTV (DTV) would stand to be the winners, doing to Netflix what it once did to Blockbuster and mom-and-pop video stores across the nation.
For its next trick, Netflix will…
Well, quite frankly, it's tough to say what's next for the home entertainment giant. And maybe that, in and of itself, answers a vital question when debating the merits of taking, or increasing, an investment stake in Netflix. With each passing year, new, virile competitors backed by massive corporations, throw their hat into the multi-billion dollar home entertainment industry. These competitors offer competitive pricing and ever-increasing content.
I would not be a buyer of Netflix at a current price around $73. To make my stance more obvious, I would not be a buyer of Netflix at half that price. The industry faces too much uncertainty, too much competition. Remember when Atari video gaming systems were in practically every home thirty years ago? I do. But only if I think real, real hard.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.