There is rising competition in the streaming industry where Netflix (NFLX) is the leader. The question is will the company maintain this lead and continue to be the preferred choice for streaming customers? Comcast (CMCSA) and Amazon (AMZN) are its biggest competitors. Will these companies rise up to the challenge? This depends a lot on their innovation to improve content, which will lead to an increased subscriber base. Netflix is the leader currently in content and number of subscribers. But the future looks to change.
Amazon prime service
Amazon prime service plans to increase its count of subscribers to about 10 million by end of 2012. In August 2012, it had over 22,000 titles in its streaming library. This represents a 70% growth. The company signed a deal with Epix in September. This move will add more than 3000 titles to its library. The device reach for Amazon is not bad. Subscribers stream content on kindle Fire, Blu-ray players, PS 3, iPad, TVs and Xbox 360. The subscriber base for Amazon prime service is large enough to cause concern for Netflix. Furthermore, we see its streaming library growing at a fast pace and is sufficient enough to attract customers. Netflix cannot ignore Amazon's streaming catalog and growing subscriber base as it presents the highest competitive threat in the United States streaming industry.
Still, doubts remain whether Amazon can continuously improve its streaming content. It is unwilling to separate streaming as a standalone service. This indicates the company may not invest enough to improve its streaming catalog to make it good enough to attract customers who are looking to take advantage of free shipping together with other add-on video entertainment. However, the company has a strong capital base and the ability to invest heavily on content. This presents a significant advantage over Netflix. Furthermore, Amazon's huge base of loyal customers makes it easy to market its streaming service.
Competition is catching up fast
Netflix has a significant lead in the industry in terms of subscriber base and content. Even though its competitor, Redbox (CSTR), is growing fast, it doesn't have a streaming service in place yet, and its revenues are less than half that of Netflix. Amazon and Comcast are Netflix's main competitors in terms of subscriber base and content. In this industry, investment in streaming is where the future looks brightest. Netflix still has advantage over its competitors in terms of content quantity and quality, subscriber base, brand image and device reach. But still, the potential strength of its competitors and their motivations to invest in content is a factor that indicates the future looks to change.
Comcast Xfinity Streampix service is competitively priced at $4.99 per month, $3 less than what Netflix charges. Comcast has doubled its available streaming since its inception. The company has greatly invested in its streaming service as a strategy to attract subscribers to cater for its pay-TV subscriber losses. Comcast advantage is it has deep pockets but it needs to improve its content and device reach. Comcast is prevalent to improve its content since it charges it separately for streaming. This means customers subscribe only if they find the content worth. Comcast has an established relationship with media companies, which it can use to gain content rights and thus improve its content to catch up with Netflix
Dish Network is a significant competitor, but needs to commit to its Blockbuster streaming
When Dish network added blockbuster streaming service, it offered subscribers true flexibility in choosing what they want to watch, when they want to watch and from where to watch. This improved its subscriber base. The advantage Dish has is its Blockbuster's existing brand, existing relationship with content owners, spending capability and motivation to improve content to meet subscriber needs. Dish capacity to make Blockbuster a serious competitor to Netflix is under doubt following the delay in regulatory approval that would have allowed it to use its acquired satellite spectrum for terrestrial data communication. Thus, Dish's original plan to sell mobile devices that utilizes the spectrum for Blockbuster streaming is in jeopardy. However, Dish still has the capacity to leverage Blockbuster and give it muscle to compete with Netflix.
Future scenario for Netflix
The current price estimate for Netflix stands around $96. This implies a premium of about 50% to the market price. This will depend on how the market evolves. An estimate of Netflix subscriber base in the future stands at 40 million by end of 2019. If competition becomes stiff, and the subscriber base comes to around 30 million, Netflix price estimate would stand at $80. The stunted subscriber growth could also be accompanied by a further in rise content costs as competitors bid prices up. In this case, the estimate price can fall to $70 on assumption that Netflix's overall content cost would increase to 60% of its revenues.
Netflix subscribers find its service extremely satisfying. Even though there is a strong rise in competition, it provides the best subscription streaming content and its video quality is good. Competitors such as Amazon, Comcast and Dish Network are still trying to catch up in terms of content and subscriber base. The challenge Netflix needs to address is how it will maintain its leading position in this market in the face of rising content costs and the potential of its new competitors. Right now, Netflix is still ahead, but the purchasing power and established customer base of its competitors are powerful factors that will propel their fast growth in the future.
Netflix will be able to defend its business if its internal opportunities are successful. We see that the U.S. market is getting more competitive. This has led Netflix to diversify its business internationally. The company has launched in Sweden and is expected to expand to Denmark, Finland and Norway. I think Netflix will continue to trade between $60 and $100 well into the future, unless Amazon and Comcast goof up, which is highly unlikely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.