The obvious problem is that of content. While it would be nice if all content was available on all platforms, that’s not a practical solution. If exclusive deals are out there, The Walt Disney Company (NYSE:DIS) is the one I’d like to have if I were Netflix, Inc. (NASDAQ:NFLX). In addition to the cartoon classics, Netflix also gets exclusive rights to Pixar, Marvel and Lucasfilm. So it also gets mega-hits like Iron Man and the Avengers, Star Wars and Indiana Jones and even Toy Story and Finding Nemo.
The other issue is friends and allies. By partnering with The Walt Disney Company (NYSE:DIS) there’s a chance that Disney will bail Netflix out if needed. Disney gave up on its own streaming service last year and might just be looking to re-enter that market at some point. Disney has the money to make it happen if needed, and it could fend off players like Carl Icahn – who’s eyed Netflix in the past – and others like him.
An Expedient, But Useful, Partnership
In terms of share value Netflix, Inc. (NASDAQ:NFLX) has been nutty. During 2010-11 it went through a huge run up which saw it go from the low 50s to almost 300 on the basis of very little real news. Then it dropped off as people realized what they’d done. Since the beginning of 2012, though, it’s both been stable and quickly run up, depending on what months you choose. Still, since the beginning of the year it’s up 76%, and it’s operating at a (admittedly small) profit. Still, any profit, considering the firm’s cost for content and overseas expansion, is good news.
In terms of The Walt Disney Company (NYSE:DIS), it’s hard to see a real impact on its shares – other than the obvious $350-million-per-year-is-nothing-bad factor. The Walt Disney Company (NYSE:DIS) was a good, solid buy before the Netflix deal and remains one now. Over the last 12 months shares have grown 47.1% compared to the S&P’s 13.5%. Toss in a net margin of 14.60% last year and a respectable dividend of 1.22% and there’s a lot to like. If the company does make a run at acquiring Netflix or another streaming service that’ll be a strong buy indicator, too.
It’s Not Like They’re Alone, Though…
Netflix, Inc. (NASDAQ:NFLX) needed the help. The streaming video market is expanding rapidly. Several companies are either already involved or ramping up their own efforts to get a piece of the sweet digital delivery money. Demand for such content is high and likely only to get higher as truly high-speed broadband penetrated deeper into American households.
The first, and most immediate, challenge to Netflix, Inc. (NASDAQ:NFLX) is Amazon.com, Inc. (NASDAQ:AMZN). Amazon.com, Inc. (NASDAQ:AMZN) suffers from the same problem that Netflix does: it’s not a creator of content so it has no native base to bring to market. Everything it sells it needs to license from elsewhere. Still, the firm is big and expansive and has the muscle to stay in the game. Still, for how long? The Walt Disney Company (NYSE:DIS)’s about to be out of the picture, and other studios are going that way. What’s left when Amazon.com, Inc. (NASDAQ:AMZN) – to me already a dodgy investment with its inflated share price and 2012 net profit of 0.12% – finds itself without any premium, high-demand content to stream? Nothing good.
Another large potential headache is Apple Inc. (NASDAQ:AAPL). It would take a very, very small technological leap for Apple Inc. (NASDAQ:AAPL) to extend its iTunes system into televisions across the world. The company can already delivery content on iPhones and iPads as well as through Apple Inc. (NASDAQ:AAPL) TV devices. To place that same content through some other system than the company’s proprietary one would be a radical change in concept, though. Keep an eye on this undervalued company. Even with the recent slide in share prices it’s still very profitable and well-run. I’m looking for a strong rebound in the last half of this year. I just wish it was cheaper.
The last major competitor (sorry, Redbox) is Time Warner Inc (NYSE:TWX) and that company’s Home Box Office. HBO has been into delivering movies for a long time, of course, but it’s been aggressively moving into on-demand as opposed to scheduled delivery. A recent 10-year deal with Universal locks Netflix, Inc. (NASDAQ:NFLX) out of a large roster of premium movie content as well. Time Warner Inc (NYSE:TWX)’s another good, diverse stock for investors to hold. A mature company, it’s not as sexy as more tech-centric firms. But it does grow (67.41% in the last 12 months), pays a dividend of 1.92% and turned a 10.20% net profit in 2012. All of that makes Time Warner Inc (NYSE:TWX) worth close inspection.
Heading Downstream
In the end, the most likely scenario I see for Netflix is a buyout. Sooner or later one of the really big players will eventually snap the company up and shareholders will be joyful. The challenges that Netflix, Inc. (NASDAQ:NFLX) faces without its own diverse content library may be too much for an independent company to overcome. The important thing for you, as an investor, is to be aware of that and to watch it as it runs up and down in value with its partners.
The article Netflix, Disney and the Streaming Path Forward originally appeared on Fool.com and is written by Nate Wooley.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
