There is a lot of skepticism about whether Netflix (NFLX) can make it in the Internet technology big leagues. But what investors need to know is that this is the direction the company has chosen to go in, and that there's no turning back from it.
Netflix couldn't go back at this point even if it wanted to. Its old niche - movies sent via mail as DVDs - is rapidly being swallowed by DISH's (DISH) Blockbuster service and Coinstar's (CSTR) RedBox video rental kiosks. These have made CSTR an especially hot stock, sort of like Netflix was when they were in DVD rentals.
Netflix is putting its cash into Open Connect, a caching system that will bring its content much closer to subscribers, thus reducing transmission costs. It has also developed an Application Program Interface, or API, for third-party developers.
This means relations with app makers who might bring access to bits of the Netflix service to consumers under their own names matters. Disputes like its recent one, in which it changed API usage terms to screen consumer histories from access via the API, now do matter - a lot. If Netflix can't build an indirect channel it may be difficult for it to keep investment high in Open Connect.
Another important point about Open Connect, and the switch to being a streaming company, is that the mix of content it's delivering is changing. It's no longer about movies. Now it's about old TV shows. Consumers can use Netflix to binge on entire seasons of their favorite shows, putting it in more direct competition with the cable and phone ISPs which are providing their own services in this area. Doubling the lobbying budget may not be enough.
The transition has turned Netflix from a $3 billion in sales/year company with margins to a $3.6 billion in sales/year company without margins. Total liabilities on its balance sheet have increased four-fold in just the last year, and the stock is now trading at levels below those at the start of the year.
Investors need to look very closely at the next few earnings releases and be prepared to bail or go short again if it can't acquire some top-line momentum.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.