Netflix, Inc. (NASDAQ:NFLX) is one of today's most highly scrutinized and criticized companies. We all know the story, so I won't bother getting into the details other than to mention that higher costs to acquire content are eating away at Netflix's streaming operations to the point of negative income. The once hailed DVD business segment is no longer a growth component and now regularly posts quarterly DVD account losses.
Despite Netflix's woes, there are enormous opportunities which abound surrounding the future of how content will be distributed and consumed.
Today, many households have a combination of Internet services and either cable or satellite TV. Notable content distribution leaders for TV include Comcast Corporation (NASDAQ:CMCSA), DIRECTV (NYSE:DTV), Time Warner, Inc. (NYSE:TWX), among others. Recently, there have been multiple publications disclosing high demand for content streaming services. These trends suggest that demand for streaming will continue to grow.
There are also a few indicators regarding streaming content growth derived from general observation. First we can simply look at the number of tablets and smartphones that have been sold over the past year alone. Just check out Apple Inc.'s (NASDAQ:AAPL) most recent quarterly filing page 26. More mobile devices allow people to consume content more often throughout the day.
Another indication of streaming popularity is the investment in and development of streaming services by cable distribution/network companies. Comcast (xfinity streampix), CBS Corporation (NYSE:CBS) (Showtime), and Time Warner (HBO GO) are all examples of this.
Amazon.com, Inc.'s (NASDAQ:AMZN) (Amazon Prime) streaming service is ramping up content agreements, and Coinstar, Inc. (NASDAQ:CSTR) and Verizon Communications, Inc. (NYSE:VZ) have agreed to co-develop a new streaming service.
Video sharing sites continue to proliferate on the Internet and most if not all major informational sites including Google, Inc. (NASDAQ:GOOG), Yahoo Inc. (YHOO), Microsoft Corporation (NASDAQ:MSFT), etc. all provide enormous amounts of video content.
While all these signals point towards continued higher growth in streaming demand, Netflix's role in this future will be significantly challenged.
Content vs. Distribution
Netflix has a competitive advantage with its streaming service. Netflix has more unique streaming users than Comcast has cable subscriptions. By that statistic, Netflix can claim the largest subscription audience as a content viewing platform in the country.
My concern for Netflix stems from the fact that it is solely another "platform" for access to our preferred TV shows, movies, and documentaries. Netflix has been quoted in the past making statements regarding its service as being more of a supplement for other services; whether it be catching up on TV shows prior to a new season, or watching a movie prior to a sequel or prequel.
So the question is, how successful can an online content platform truly be? Or, how successful can any company be relying only on a content viewing platform?
For answers I look no further than Comcast. Comcast has quietly been transforming itself into a major content owning company. The recent 51% purchase of NBCUniversal in 2011 was a major diversification from its core video/Internet/voice subscriber services. Its more recent acquisition of MSNBC.com includes a more robust Internet property as well. All eyes are on the next couple years, assuming Comcast will acquire the remaining 49% stake in NBCUniversal from General Electric (NYSE:GE). Comcast recently sold its 17% stake in the A&E Network for a roughly cool $3 billion, to free up some extra cash.
Looking at Comcast and Time Warner, it is evident that owning content is an important factor for growth and diversification. Comcast's move makes sense to me, the company wants to hedge its distribution segments, and get access to the strong potential growth of the NBCUniversal properties. We need only look at the recent events between DIRECTV and Viacom, Inc. (NYSE:VIA) to see how valuable content truly is, roughly $600 million a year over 7 years for Viacom.
As more companies are consolidating and spinning off major content assets, it is clear that content holds much of the leverage for the future.
Being solely tied to distributing content is not going to provide strong margins and as evidenced with satellite providers, may encompass significant debt.
Stream or Bust
So while Netflix continues to move forward with aggressive plans to expand internationally, I would caution investors to think about the consequences of relying on an online content distribution platform as a key driver for growth. I would also caution investors to think broadly regarding companies focusing on distribution platforms as a sole source of revenue for their business.
The threats of competition have been picking up steam over the past year and I would say that they now are beginning to impact Netflix's growth. Both domestic and international growth are slowing, and Netflix typically has content agreements ranging between 6 months - 5 years. Content costs will continue to rise and companies like Discovery Communications, Inc. (NASDAQ:DISCA) still place a higher value on long-term affiliation agreements to generate a steady revenue stream for program development versus online streaming platforms. Additionally, Discovery's acquisition of Revision3 also suggests that it is thinking ahead for the streaming market as well, regardless of Netflix.
Netflix will possibly be able to continue to survive and take part in the continued demand for streaming. From an investment standpoint, however, Netflix has much to prove.