Can Anything Stop Netflix?

Shares of Netflix (Nasdaq: NFLX  ) hit an all-time high in intraday trading today, once again reaffirming the company's seeming immortality.

The video rental service keeps kicking, despite a host of slings and arrows :

  • Studios are reassessing the value of making their content available online through Netflix, in light of weak syndication interest for shows freely available in cyberspace.
  • Revenue per subscriber continues to shrink, and while investors initially cheered last month's price hike, it may also increase subscriber churn. At the very least, it will escalate the number of Netflix couch potatoes downgrading to cheaper plans with fewer DVDs.
  • Its streaming business seemed threatened when content-delivery partner Level 3 (Nasdaq: LVLT  ) got bullied by the country's largest cable broadband provider.
  • CFO Barry McCarthy stepped down in December, hoping to eventually catch on as a CEO elsewhere. He left on good terms, suggesting that he has no plans to compete against his good friend Reed Hastings. However, McCarthy joined the board of Pandora last week. 

These may seem like petty obstacles for Netflix, but let's dive a little deeper.

Time to slay some demons
Studios will want more when they renegotiate their deals with Netflix. The first major renewal will surely be costly for Netflix, as it attempts to re-up its deal with Liberty Starz (Nasdaq: LSTZA  ) . However, no rival service even comes close to Netflix and its 20 million subscribers.

Netflix argues that there is no single content deal that it absolutely needs, since no streaming service will ever be all-inclusive. If Starz walks away, it's hard to fathom that the cable giant will make Netflix-sized dollars elsewhere. Let's not assume that the content owners can call the shots here. Revisit the music industry if you want to see how the primary digital distributor ends up with the majority of the clout.

As for customers trading down to cheaper plans with fewer discs, Netflix wouldn't mind that one bit. Streaming is cheap, especially pitted against the fulfillment costs involved in shipping, packaging, and managing physical inventory.

The battle between Level 3 and Comcast (Nasdaq: CMCSA  ) may have been a thorny tech matter regarding peering agreement practices, but the public took it as an affront to the larger net neutrality issue. In a nutshell, if you think a broadband provider can shut down Netflix streams and still win in the court of public opinion, you're wrong.

Finally, we have McCarthy joining Peter Chernin at Pandora last week. Let's not dismiss this threat entirely.

Pandora's audience doubled to 75 million last year. Like Netflix, it's a cloud-based entertainment service. However, Pandora is music, while Netflix is film. Pandora is free to most users. Netflix is not. However, it's not entirely unfathomable that Pandora could evolve in a few years to stream more than just music through its custom-tailored recommendations engine. It has the user base to shoehorn its way into more types of media.

Paying the Piper
Balanced against all those looming obstacles, today's splash of Netflix optimism stems from an encouraging Piper Jaffray report.

Analyst Mike Olson is encouraged by a report out of Internet traffic tracker Comscore. Visits to Netflix.com in this quarter to date have spiked 34% year over year, leading Olson to believe that the company will fare well in piling on gross subscriber additions.

The same traffic report shows a possible 30% decline at Blockbuster.com this quarter, and a 27% spike at Coinstar's (Nasdaq: CSTR  ) Redbox.com.

Investors may disregard the slide at Blockbuster, now that the fading retailer is in bankruptcy, but NCR (NYSE: NCR  ) shareholders should be taking notes. NCR is bankrolling the Blockbuster Express kiosks, which stand plenty to lose if the Blockbuster brand continues to disappear.

On the other side of the news, I'm approaching the traffic upticks at Netflix and Redbox cautiously.

What if the uptick in Netflix's traffic -- beyond streaming, naturally -- is related to active subscribers switching to streaming to avoid higher bills? What if the boost in Redbox.com traffic owes more to confusion over availability than to the logical absorption of Blockbuster refugees? After all, Coinstar's blaming delayed release windows for recently hosing down its near-term outlook. I'd be checking Redbox.com, too, to see whether a new DVD is actually out on Redbox.

We'll find out for sure in a few months. Olson scores points for going out on a limb early, but this industry is evolving rapidly.

Netflix will live to have the last laugh -- but it should be a nervous laugh at that.  

Would you rather invest in Netflix or Coinstar at this point? Share your thoughts in the comment box at the bottom of this queue.

Netflix is a Motley Fool Stock Advisor pick. 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.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (11)

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  • Report this Comment On February 09, 2011, at 7:33 PM, MKArch wrote:

    <<<However, no rival service even comes close to Netflix and its 20 million subscribers.>>>

    -------------------------------------------------------------

    The cable companies blow NFLX out of the water. The content providers aren't going to screw them for a glorified middle man. BTW the glorified middle man will no longer issue standard metrics on subs starting 2012, in particular churn. How long do you think they keep their 20M subs?

  • Report this Comment On February 09, 2011, at 9:04 PM, BestTimesNow wrote:

    Like many people I subscribe to the Netflix streaming only plan, but I get new release movies from Redbox. DVDs & Blu-rays are far from dead so I am a Coinstar investor for the following reasons:

    Redbox has 23,000,000 registered customers. Redbox added about 2,000,000 customers Q4, 2010.

    Netflix has 20,000,000 subscribers. Netflix added about 3,000,000 subscribers Q4, 2010.

    Coinstar has a market cap of $1.23B, so you are paying about $53 per customer. (Much less if you pull out the value of the coin machines)

    Netflix has a market cap of $11.62B, so you are paying about $581 per customer.

    The studios can and will raise the license fees for Netflix.

    Both companies are still growing very fast, but Redbox has a better chance of holding their fees down. The Netflix postal fees were only going up so the streaming only plan was a win/win as many customers chose this plan. I wonder how many people use both services.

  • Report this Comment On February 09, 2011, at 11:13 PM, desirevideo wrote:

    To put this in perspective, Summit is suing blockbuster on a past due bill for 9 million dollars owed on only 1 dvd title...Twilight Eclipse! In comparison Starz sold their streaming rights for only 25 million. I'm sure Reed sold them by telling them that they wouldn't get any more selling old catalog titles through retail sales but the studios didn't consider how putting the equivalent of a large video store in everyone's home would cannibalize any future sales. If the studios have any brains they would slowly shrink the amount of NFLX streaming and then they could recoup some of the bluray and on demand losses. I know piracy is a looming concern but they are hastening their own death by taking the short money up front. If they give a small amount of streaming and sell a la carte titles at a reasonable rate, people will still pay for high definition quality streams. If they continue to let NFLX con them, they will end up the destroyers of their own industry.

  • Report this Comment On February 10, 2011, at 4:07 AM, binkenhiemer wrote:

    If I were a CEO at a movie house, I would read up on exposure sales. The fact is most people do not decide to buy a DVD or BD until they have actually seen the film. In other words, streaming helps sales. On demand streaming at low cost helps sales even more. Even the best HD streaming is not equivilent to Blu ray. People will buy BD for the same reason they don't pirate good software, they want the doc (cover) and they want best representation of the product. So that very good HD exposes people to a film, they fall in love, and by the BD and are even more awed.

    This effect has been known in the software industry at all with Datapro pointing out that the bad old "pirates" help sell about 3 to 4 times more software than the companies lose to the pirates.

    Let's hope the are morons like in software and don't kill their golden goose.

  • Report this Comment On February 10, 2011, at 4:12 PM, desirevideo wrote:

    Giving away product never increases sales unless it is finite. You see the people giving samples of new dishes at a grocery store? Of course if you give a small taste people will buy more of the product than if they never tried it. However, imagine if you went back to the grocery store and they kept giving it away in full serving packages. Would you buy it? Of course not. It is a complete fallacy that piracy increases sales otherwise music sales and dvd sales would be through the roof. The superbowl rating just set an all time high thanks to media exposure and social networking...meanwhile tv ratings are at an all time low. The enormous gap between today's nielsen's and the superbowl rating is evidence of how much television is consumed on pirate streams and torrents. If you really believe that piracy will increase sales you would invest in a physical dvd store or a cd store but everyone knows that would be lunacy. The only way that model or even legal streaming models would be viable is if the government would eventually crackdown on illegal streaming and downloading.

    NFLX is only alive right now because the studios grossly underestimated the value of their content and they are essentially giving it away in fear of getting nothing from the pirates. Instead of being afraid of piracy they should take a proactive approach and offer 1 billion dollars, hell even 10 billion to the first person that can design a program to effectively limit piracy. Anything is possible given enough motivation

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