Reading the Cards
Netflix, Inc. (NASDAQ:NFLX) share prices soared in late January, more than doubling between Jan. 22 and Feb. 19. This was due in large part to a perfect storm of positive earnings in the previous quarter, high-profile deals that have paid out a bit now and are primed for larger payoffs in the coming years, and the certified hit status of “House of Cards.” The company will really need to get its house in order if it expects this to be more than just a temporary surge. The current lineup of original programming is made up of a number of relatively safe bets… “Arrested Development” will be a hit because the existing seasons are among the top-watched shows on Netflix. Horror produced by Eli Roth? Guess who’s directed some well-ranking horror films. Crime-related comedy by the creator of “Weeds?” A children’s show based on a DreamWorks Animation children’s movie? These aren’t exactly risks, and the decisions on what to produce have largely been made based on the company’s viewing demographics. When it will become riskier is in future rollouts, when everyone’s used to the Netflix original programming and there aren’t quite as many untouched genres to choose from.
Netflix will also have to compete with increasing pressure from its competition, and a full slate of original programming will only take the company so far. Consumers who want streaming and DVD rentals may be drawn to Redbox instant because it offers both without the premium cost of renting a few movies. Add in the potential for unexpected hits from Amazon’s in-house production studio (which isn’t drawing top-name talent, instead relying on the community for pitches and even scriptwriting services) and Amazon Prime could end up with a few exclusives of its own. Given that both Redbox Instant and Amazon Prime are priced competitively against Netflix’s streaming offerings and are cheaper than a Netflix subscription with both instant viewing and disc delivery, the convenience of Redbox Instant and competing original programming from Amazon both have the potential to make it difficult for Netflix to stay on top in the long run.
One other factor to consider is the potential for the US Postal Service to stop Saturday delivery, a cost-saving move it hopes to execute in August and has been considering for some time. If the USPS does cut Saturday delivery, this could have an impact on Netflix’s DVD and Bluray customers by eliminating 4 or 5 days that they could receive new movies each month. From a financial standpoint this could benefit Netflix to a point since the slowing of disc delivery would result in a slight reduction in postage costs for the company, but at the same time it could drive away disc subscribers who don’t want to pay the same rate for fewer movies each month. Netflix is already having problems maintaining its disc subscription numbers, and the influence of the Postal Service might push more customers to the waiting arms of Redbox or other alternatives.
And the Winner Is…
At the moment, neither Amazon Prime nor Redbox Instant are necessarily in the position to be called “Netflix killers.” Prime offers a decent catalog of free options with a subscription, but these offerings overlap heavily with those of Netflix and the premium rental fee for other releases may turn off some viewers. The lack of a month-to-month payment option could also be a hindrance, though Amazon did test a monthly subscription offering last year that could potentially make a return at some point in the future. Likewise, Redbox Instant’s limited streaming catalog and lack of TV shows could make it harder for them to draw in customers who want more selection (and often complain about the lack of options in Netflix’s much larger streaming catalog.) If Redbox Instant can offer more first-run movies and increase its catalog of “movies that matter” over time then it might become a much stronger force in the streaming entertainment industry than it has the potential to be right now.
Even without a major competitor ready to knock it down, it’s unlikely that Netflix’s current high is sustainable in the long-term. The company’s unlikely to completely bottom out, especially as it expands into new territories and has started offering 3D streaming services as an added draw in some areas. It even has the potential to reascend to loftier heights after a decline if it manages to create additional “must see” originals, especially once some of its deals such as being the first-run provider for Disney films starting in 2016 really start to kick in. While I feel that the company is currently overvalued, if it plays its cards right I could definitely see it retaining a high value even in the face of stepped-up competition.
The article Building More than Just a House of Cards originally appeared on Fool.com and is written by John Casteele.
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