Growing competition and billionaire investor Carl Icahn could pose big problems for Netflix (NASDAQ:NFLX) over the next few months. Even though the company seems to have gained some ground through increased subscriptions (in the U.S. and other markets including Canada, Latin America, and Europe), and by producing original programming for exclusive viewing on the company's website, Netflix may not have time to make the big, bold changes it needs to remain profitable.
The Shadow of Competition
No one can deny that increased competition in the online streaming market from Verizon (NYSE:VZ) and Coinstar (CSTR), Comcast (NASDAQ:CMCSA), and Amazon (NASDAQ:AMZN) have cut into the company's core subscription base. Unfortunately, with few ways to distinguish its streaming services from the competition, Netflix relies mostly on its brand to attract new customers and keep existing ones.
But the competition has grown fierce. Amazon recently announced a new monthly payment structure for Amazon Prime members. For $7.99 per month, members receive two-day shipping in addition to unlimited online streaming of movies and television programs. While this may not cause many current Netflix subscribers to abandon the service in favor of Amazon Prime, it may decrease the number of new subscribers Netflix needs in order to remain profitable.
For now, customers may subscribe to multiple online streaming services to watch a variety of movies and television shows, but over time, especially as the competition increase their online catalogues, customers may end up choosing one service over the others - this is a risk Netflix really can't afford right now.
Over the past few months, Amazon, Verizon and Coinstar, which owns Redbox, have struck deals with movie and television studios to provide customers with expansive media libraries. Verizon and Coinstar plan to release a joint online streaming service soon. Netflix has lost a few deals including one with Starz to stream new releases and popular movies. Netflix has tried to entice new and existing subscribers, however, through deals with studios to exclusively stream popular shows like Arrested Development (reruns and a shortened new season). In addition to maintaining a well-known brand, competitors in the online streaming market must also maintain a movie and television library diverse enough to appeal to a large number of subscribers. Comcast offers online streaming to customers as part of its Xfinity cable service.
Recently, billionaire investor Carl Icahn bought shares of Netflix stock - enough to gain control of 10% of the company. With a reputation for shaking up management (and breaking up companies to turn a profit) at other companies including Blockbuster, Icahn's presence could cause major issues for the Netflix board of directors. In an effort to stop Icahn (or any other investors) from having too much influence over the direction of the company, Netflix issued a new stockholder rights plan which makes it very difficult for investors to try to take over the company.
In the past, Netflix has made very clear statements concerning the direction of the company. These plans include further expansion into new regions around the world. While many analysts disagree with these plans - some analysts suggest the company should work in increasing its movie and television library instead - Netflix CEO Reed Hastings has continually pushed for expansion along with enhanced customer service. Investors such as Icahn could cause management to rethink this strategy or consider alternative agendas that include selling the company.
Going forward, investors should pay close attention to how Hastings and the board handle growing competition and unwanted advice from those with large stakes in the company. Any missteps or hasty decisions could cost the company in both profits and subscribers or lead to a quick sale of the company to a competitor.
Remaining successful in a market that's become saturated requires quick thinking and the ability to look ahead. Unfortunately, Netflix didn't look ahead when it decided to break online streaming and at-home DVD delivery into two different services. Hopefully the company has learned from this costly mistake.
With third quarter sales/revenue totaling $905.09 million (up from $821.84 million in 2011), Netflix has proven it can win back subscribers and court new ones. How the company moves ahead will determine it success in the future. Taking advice from investors like Icahn, who at one time owned a large stake in Blockbuster, may not prove successful. Blockbuster, which could have turned into a huge competitor for Netflix decided to focus on its retail outlets instead of its growing online streaming service. In the end, the company filed for bankruptcy. It was Icahn who replaced then-CEO John Antioco with Jim Keyes who changed the company's direction and sealed its fate.
At this time, it's unclear if Netflix will beat the competition or if it will settle for third or fourth place in the online streaming market. It's also unclear how much influence it will let investors like Icahn have in its decision making. By releasing a stockholder rights plan, the company has made it clear that it will continue to move forward into new territories to see its expansion plans through to the end. Whether this is the answer to Netflix problems remains to be seen as the online streaming marketplace is new territory for all involved.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.