3 Keys to Netflix in 2011

Netflix (Nasdaq: NFLX  ) is one heck of a polarizing stock.

Whatever you think about the service the movie maven provides, you're either shorting the stock to high heaven because of its generous valuation or buying it with an optimistic eye to the future. More than 32% of the float was sold short at the last reckoning, and that was after Netflix more than tripled its share price in 12 months.

So which camp will celebrate its profits next year, and which will face a gaping hole in its collective portfolio? That depends on how these three key issues work out.

Competition
Everybody and her uncle are whipping up their own digital movie services these days. If they're not building their own, like Apple (Nasdaq: AAPL  ) is doing with the movie section of its iTunes store or Amazon.com (Nasdaq: AMZN  ) with its On Demand service, they're leaning on middlemen for a quick and easy fix.

If that's not enough, the cable guys are fighting back with their high-def channels, a light sprinkling of 3-D services, and their oft-neglected on-demand features.

This may sound like a significant challenge for Netflix, but the company has yet to face meaningful competition in its core market. So far, "competing" services have either been sold as pay-per-view solutions or required that you already subscribe to the right cable plan. And that's not where Netflix plays, or plans to play.

If Apple or Comcast (Nasdaq: CMCSA  ) open up an affordable subscription service in 2011, then Netflix might be in trouble. Also, the 2011 snowball fighting championships would be held in South Florida.

Costs
Content costs will inevitably rise as Netflix adds to its subscriber base and studios feel entitled to higher fees. Some see this as a major stumbling block, destined to crush the company's profit margins.

The company contends that it will adjust its spending as the market changes. Higher costs would then lead to less content rather than lower margins, which is bad for Netflix's growth plans but not disastrous for profitability.

It would take a concerted effort by all of Hollywood to make content impossibly expensive for Netflix. Could it happen in 2011? Sure. It's just not a likely scenario.

Inertia
Perhaps the largest stumbling block to Netflix joy lies in old consumer habits.

I've given up cable TV in favor of Netflix streams and a gaggle of lesser online services. There's a wide variety of hardware available for the erstwhile cord-cutter, making it easy to find an option that fits your needs. However, consumers still don't think of connectivity as a selling point for their TV sets.

That will change as Netflix and other digital media services gain mainstream recognition. Will Netflix become a verb in 2011, like TiVo (Nasdaq: TIVO  ) and others before it? I think it just might -- or maybe it already happened.

Otherwise, you're firmly on my side of the fence.

Do you think Netflix is doomed in 2011? If so, The Motley Fool has created a brand new free report called "The Motley Fool's Top Stock for 2011." In it, we reveal the little company set to profit from the broadband Internet expansion. Get it right here -- it's free!

Fool contributor Anders Bylund owns shares of TiVo and Netflix, but holds no other position in any of the companies discussed here. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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