Is Netflix, Inc. (NFLX) Getting a Good Return for its Content Investment?

Generally all the apps work well and provide the convenience of watching programming whenever and wherever the user wants.  Insofar as the basic technology of Internet video streaming, or in their application software design, Netflix has no compelling advantage over its competitors.

Furthermore, anyone with deep enough pockets can buy or produce exclusive content for their streaming site, so this appears to be not much of a discriminator as well.  Hulu’s owners certainly have deep pockets, as I show in the table above, as well as ample experience producing their own content.  21^stCentury Fox owns Fox Television and the 20^th Century Fox film studio, Comcast Corporation (NASDAQ:CMCSA) owns NBC Universal, and The Walt Disney Company (NYSE:DIS) owns ABC and ESPN. Hulu’s three owners easily have enough unique content to overwhelm Netflix.

Netflix prospects

Netflix, Inc. (NASDAQ:NFLX) has been alone in its market by virtue of being a pioneer in something that the big media companies weren’t convinced would be important enough for them to bother with.  The decision not to sell Hulu signals a change in their thinking.  The days of 90% market share for Netflix are over.  In an amped-up Hulu, Netflix will face its first serious competition.

I expect that competition to be bruising for Netflix, Inc. (NASDAQ:NFLX) financially and for Netflix investors.  Even if Netflix does not collapse in the face of its better funded rivals, Netflix will have to fight hard and spend significant marketing and development funds simply to maintain their current subscriber growth rate.

I expect the effect of increased competition at the very least will be to force Netflix, Inc. (NASDAQ:NFLX) to increase operating expenditures on a pace with increased membership and revenue.  Under those circumstances, ROIC never gets above a few percent, and Netflix never justifies its current valuation, as reflected in its P/E ratio.

Mark Hibben has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Netflix, and Walt Disney (NYSE:DIS). The Motley Fool owns shares of Amazon.com, Netflix, and Walt Disney.

The article Is Netflix Getting a Good Return for its Content Investment? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.