Peter Lynch said that in some circumstances imitation is the sincerest form of flattery, but in business imitation is the sincerest form of battery. Lynch believed it was very hard to make money with companies that operate in what he referred to as “hot” industries. He said what ends up happening is hot industries attract a lot of competition, and ultimately this competition leads to pricing pressure. Most people would probably argue that streaming video is a hot industry, and this business is about to pick up a competitor from the most unlikely place…the library.
The Digitization Of Everything
I first noticed the idea of libraries going to digital distribution from an ad on Facebook, ironically enough. The ad said that a new service called Hoopla was coming this yea, that would allow registered library users to stream movies, television shows, and music right to their computer. Needless to say this caught my attention not only for the investment implications, but also because this was such an unexpected development.
After doing a little bit of research, I found that a little company based in Holland, OH called Midwest Tape is behind the platform. The company expects to launch Hoopla later this year, and the service is targeted specifically at the library industry. The company hopes to offer a Netflix, Inc. (NASDAQ:NFLX) like experience to library cardholders. The service will reportedly have two lending models.
The first option will be a free, one-user and one-copy option. The second would allow simultaneous users on a per-circulation fee model. No matter what model users ultimately go with, investors need to be aware of the potential disruption to the streaming industry.
Who Wins And Who Loses?
The U.S. streaming market is the most developed and most profitable. Netflix, Inc. (NASDAQ:NFLX) has said multiple times that they hope the profitability from their U.S. streaming operations will fund their international expansion. With 33 million total subscribers, and the majority of these users in the U.S., there is little doubt that Netflix is leading the industry.
Netflix, Inc. (NASDAQ:NFLX) is producing its own original content with titles like Lilyhammer and House of Cards. Netflix, Inc. (NASDAQ:NFLX) also has signed exclusive content deals for Disney movies starting a few years from now. However, there are still many that complain that all Netflix currently offers are old and obscure movies. While $7.99 for streaming may not seem like much, customers looking to pinch pennies may decide that borrowing movies from the library online for free is a better option.
Probably the most significant direct competitor to Netflix is Amazon.com, Inc. (NASDAQ:AMZN), which says they have “millions of Amazon Prime subscribers.” Amazon plans on releasing some of its own original content later this year. In the meantime, the company is trying to gobble up exclusive deals like Downton Abbey, HGTV, and Food Channel shows.
Amazon’s Instant Video has a few challenges. First, the service requires a $79 annual charge for Amazon Prime. While on a monthly basis this is cheaper than Netflix, Inc. (NASDAQ:NFLX), paying all at once for the service is keeping some customers at bay. Ironically, Amazon’s free two day shipping and lending library that is included with Prime might actually insulate Amazon from any losses tied to Hoopla. After all, Hoopla is potentially a free service, but it doesn’t get you free shipping or the lending options that Amazon brings to the table.
A more recent entrant into streaming video is Redbox Instant, which is a joint venture between Coinstar, Inc. (NASDAQ:CSTR) and Verizon. This service is still in its infancy, as the service offers 123 movies and 171 titles at Redbox kiosks. Redbox Instant is unique, as the service offers DVDs, Blu-rays, and video games, along with streaming titles. However, at $8 a month, even with four free Redbox rentals customers may find this price to be too high for such a limited streaming selection.
In fact, with such a limited number of streaming titles, Redbox Instant seems to be most at risk from Hoopla. Customers may decide to just pick up their movies and video games from the Redbox kiosk if they need to, and get their streaming fix from Hoopla for free.
Something To Take Stock In
The bottom line is that the streaming field is about to get more crowded. Hoopla is in active negotiations with content providers, and has already signed deals with over 15 studios. With an estimated 245 million Internet users in the U.S., the market is still relatively fragmented.
Investors in Netflix, Inc. (NASDAQ:NFLX) and Coinstar seem to have the most to worry about. The rebound in Netflix’s stock price has shares trading at over 130 times projected earnings. For a company with about 27 million domestic subscribers, the company already has about 11% of the total market. For customers who don’t care about Netflix’s exclusive content, if Hoopla steals market share, Netflix’s P/E ratio could compress.
Though Coinstar sells for just under 11 times projected earnings, the company’s slowing Redbox division, and this new threat in streaming, are not good news for future growth. Amazon is ironically the most expensive stock of the group, but may be the most insulated. Amazon Prime members get streaming, free two day shipping, and the digital book lending library to boot, all for about $6.58 per month. With EPS expected to increase by more than 40% per year, Amazon isn’t cheap, but investors have less to worry about than Netflix or Coinstar at the present time.
New streaming options are great news for customers. Investors need to make sure they understand their company’s competitive position and don’t assume that this is all just a bunch of Hoopla.
The article Have You Heard This Hoopla? originally appeared on Fool.com and is written by Chad Henage.
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