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It is becoming clear that traditional cable television is being replaced by unbundled, online alternatives. A recent report estimated that as many as 425,000 Americans dropped cable and other pay TV services last quarter. Netflix (NFLX) was one of the first on the market and has just become the largest television content provider on the market. This should not be confused with most profitable. But as Netflix grows, there will be many other companies growing to compete with it. Keep an eye on Amazon.com (AMZN), Google (GOOG), Coinstar (CSTR), and Apple (AAPL) to go higher by providing television content.

Netflix

First and foremost, the number of subscribers who used Netflix for their primary source of television is up to 19%, an increase of 8% from the same time last year. This is a terrifying prospect for major cable TV content providers such as Viacom (VIAB) and Comcast (CMCSA). There is no doubt that companies offering traditional, legacy forms of television are being squeezed into obsolescence. However, new companies replacing the cable companies are struggling to maintain profitability. This is precisely the case with Netflix. It has seen its revenues and viewership increase while simultaneously watching its profits decrease. Unfortunately for the company, the disruption of television has come too quickly to develop a sustainable strategy. At least, it hasn't figured this out yet.

The lack of profitability can be attributed, at least in some part, to the buffet model that Netflix adapts for streaming content. In fact, in June, it announced that over 1 billion hours of video had been watched. One possible savior is the original programming Netflix is beginning to offer. I'm sure you remember the disastrous price increase last year that caused a huge client backlash. Well, for Netflix to become sustainably profitable, getting above the almost nonexistent profit margin it currently has, it has to give customers a reason to accept a price increase. Solid original programming that cannot be found elsewhere might just be the missing piece of the puzzle.

To be exact, Netflix has gotten some solid television shows that it offers exclusively. Original show Lilyhammer received good reviews and it will offer at least two solid new shows next year. Cult hit Arrested Development should drive viewership up also when it airs. The company will need to increase prices at some point, I think that's inevitable, and with the exclusivity of quality programming, it might have a good enough reason to do so. Especially with Viacom pulling all of its shows off DirecTV (DTV) due to disputes on programming fees, Netflix might see more migration to its services. It desperately needs this. An abysmal EPS of under $0.10 cannot last very long.

Amazon.com

Low margin king Amazon.com is quickly becoming a strong competitor in the online content streaming space. Amazon's particular blend of instant streaming has many more offerings than Netflix, but this is due to the fact that customers can purchase episodes of TV shows, much like they can do with iTunes. Amazon, in my opinion, is a harder sell due to the one-time fee of $79 that it charges for a Prime membership, which a user needs to access instant video.

However, much like Netflix, it is also beginning to offer original content. This could drive many to its services, but I doubt it will have much of an effect anytime soon. The problem with having many competing companies in this space is that there are too many people using traditional cable. Netflix accompanies many users cable TV service. If given the option of adding an online provider to their traditional cable provider, you can bet they will opt for Netflix's low monthly fee over Amazon's high initial fee more often than not.

Coinstar/Redbox

Coinstar is very different from any of the aforementioned stocks, mainly due to the fact that its revenues rely primary on Redbox's physical DVD rentals and allows customers to pick up said DVD. And more people have been using the service recently, driving up revenues and increasing the brands presence. As it moves into other markets, Coinstar will begin to diverge from streaming content providers, but currently it is looking to replace the physical DVD rental aspect of other services. Still, for its increase in users, it's trading price is down almost 20% in the last three months. It's 2Q numbers weren't nearly as good as 1Q and it's profit margins are nothing to brag about. The lack of the subscription model alleviates some headaches with customer satisfaction, but it's success is tied to the movie market in general. It doesn't have Netflix's back catalog, and if new movies aren't doing well, Redbox may not either. Analysts have set a $50 price target for Coinstar and put to a solid $4.85 EPS for the year, but most other analysts have slapped an "outperform" rating on it already.

Apple

By now everyone knows Apple's iTunes store. It allows users to purchase an episode of TV at a premium, but is absolutely not a buffet like Netflix or Amazon. To some extent, the service differs greatly due to the fact that it is a high margin profit driver, something neither Amazon nor Netflix can say. However, it might not be too long before a move to streaming TV occurs, as it currently is moving to a buffet style model with music. If this move is successful, expect Apple to adapt a similar model with TV. You can also be sure that it will do so with higher margins than other services.

Google

Right now, Google is a wildcard in online streaming. Many expect its Google Fiber high speed broadband to roll out an online content streaming service. There is so much mystery surrounding the project that Time Warner is offering $50 for information regarding Google Fiber. With aggressive targets for the expansion of the Google TV, using Google Fiber to augment Google TV seems likely. While there isn't much in the way of solid information, an extremely fast broadband connection has the potential to drastically change the streaming content space.

With TV subscribers cutting the cord, investors want to know where they're flocking too. Right now, I'd say it looks like they're going all over, using the best aspects of multiple services. Netflix will keep its numbers high but it can't prop its revenue along the same curve. Until they can figure out a better way to drive revenue from the buffet, Apple and Amazon will have a chance to move in. RedBox is safe for now, but if Apple and Amazon can stream the same movies instantly for the same price, then there's really no advantage. I can't recommend one over the other completely. Not yet, anyway.

Source: Who's Winning The Race To Replace Television?