Will Anyone Ever Challenge Netflix?

It seems like everyone is gunning for Netflix (Nasdaq: NFLX  ) these days. The movie mailer turned on-demand titan has built such a successful business in a distribution space that should hypothetically have very little competitive advantage. The company doesn't run cable lines directly into your house, it would be easy to switch to another similar service, and it doesn't have nearly the relationship with studios that cable companies do. This should be easy pickings for media giants like Time Warner Cable (NYSE: TWC  ) , Comcast (Nasdaq: CMCSA  ) , and even Apple (Nasdaq: AAPL  ) -- all of which should be able to replicate the model.

But no one can seem to get it right. Fellow Fool Tim Beyers thinks Apple will get it right in the next few years -- and I agree -- but for now there are no really compelling competitors.

XFINITY gets it all wrong
Last week the upgrade to XFINITY made its sweep through my local market. After, I couldn't decide if I had been upgraded or sent 20 years into the past. It's great to have on-demand access to TV shows I've missed recently, and I even came across a few I didn't know existed. But I couldn't help but think Comcast was trying to bring DOS back from the dead. Menus are grainy and difficult to navigate and I have no idea what will be available when. One of my best hopes of competing with Netflix fell flat on its face on my television. At least the online product isn't too bad.

Probably the best competitor is Hulu -- born of a partnership between Disney (NYSE: DIS  ) , Comcast's NBCUniversal, and News Corp (Nasdaq: NWS  ) -- which has a product that may be able to compete. However, it hasn't proliferated to as many devices as Netflix. With Comcast as a part owner of Hulu, I was hoping it could either bring Hulu to my TV or learn from it for XFINITY. As big as the movie vaults are at Disney and Universal, Hulu offers a pretty weak selection of films. When Totally Baked makes the list of all-time most popular, you know the selection must be weak.

So far, XFINITY and Hulu just haven't lived up to the hype.

Why can't cable get this right?
Cable providers have tried and so far failed to make a product that can replace Neflix. Count me disappointed that $90 a month isn't enough money for Comcast to make a product that can replace Netflix's $7.99 per month subscription.

Who do you think could possibly challenge Netflix? Leave your thoughts in the comments section below.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, Netflix, and Walt Disney. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended buying puts in Netflix. 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. The Motley Fool has a disclosure policy.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.


Read/Post Comments (7) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2011, at 9:04 PM, sayatnova wrote:

    amazon is your answer

  • Report this Comment On May 31, 2011, at 10:24 PM, colddish wrote:

    Once a company is the brand, it's a little too late for the competition. And if you are another successful company that is a brand doing what it does, do you really want to jeopardize that trying to be something else? For those companies, "If it ain't broke, don't fix it" may be a cautionary dictum worth heeding.

  • Report this Comment On June 01, 2011, at 12:43 AM, MikeVids wrote:

    The studios and networks need to find a reasonable price (1.99 perhaps) and stop giving away their product for free. The smorgasbord model has served its purpose of breaking down customer resistance to streaming... now they need to stop devaluing their product by taking the short term money and commit to the a la carte model. As the government begins to close more pirate sites... people will pay for a cheap stream with a clear picture. People only resist because NFLX is there...but if they took away half of its content then they'd pony up for the premium shows. The problem with the smorgasbord is that it's a time sink... so it kills a lot of the desire for someone to go find a new show... if there was no more NFLX... the studios would find a huge market for a la carte streams and they would actually be able to make movies and shows again.

  • Report this Comment On June 01, 2011, at 8:47 AM, MKArch wrote:

    Travis,

    I think you are asking the wrong question. You should be asking why aren't AAPL GOOG and AMZN going after subscription streaming when they could blow NFLX out of the water if they wanted to take this market. NFLX has ~$0.35B in cash to AAPl's $29B. Cost of content will be roughly equivalent to number of subs so low sub count initially will also result in low content cost particularly for the AAPL, GOOG, AMZN of the world. That means they can afford to blow NFLX out of the water on a content cost per sub basis and just take the market from NFLX if they wanted it. The fact they are not going the subscription route should be telling you something.

    To me the answer why the big boys are passing on the subscription model is glaringly obvious. Take a look at their churn numbers. They consistently lose around 1 sub for every two they sign up. When they saturate on new subs they will continue to hemorrhage subs and their total sub count will quickly go backward leading to a death spiral as they will have to cut content costs to match their dwindling sub count.

    Right now they signed ~59M subs since 2002 most over the last couple of years however there are only ~75M broadband households in the U.S. Some of the subs they signed are surely repeats but they have to be near saturation. This would also explain why Hastings won't give out churn metrics after 2011. That should have been a huge red flag to anyone not willing to suspend disbelief.

    Take a look at recent announcements from content providers regarding NFLX value to them. Starz CEO mentioned a few months ago that if NFLX wanted cheap content they'll just get less of it and recently moved to cut back on content even before they do a new deal (if they do one) Likewise Showtime moved to restrict content, HBO won't even deal with them. There was a mention recently that Starz is telling NFLX right now that they need to charge money on the order of what their cable customers charge if they want to renew. I don't remember the studio but who ever owns Avatar was quoted the other day as saying Avatar would never make it to NFLX and that while NFLX may be appropriate for tv re-runs it's not appropriate for premium newer movies. Hastings confirms this by embracing the re-run tv moniker. What ever faults X-Finity might have right now it's no additional cost to it's subs. How long can NFLX compete with free in the re-run tv competition?

    IMO the answer to why AAPL,GOOG and AMZN aren't even entering the subscription streaming business is because it's not sustainable. How long can keep subs coming back to the re-run tv service? Sure they have a ton of subs right now but how many will they have in a couple of years? AOL had a ton of subs at one time and was a wall street darling as well. Having a lot of people give you a shot because it doesn't cost much does not make a sustainable business.

  • Report this Comment On June 01, 2011, at 12:04 PM, Darrellwgray wrote:

    I am rather new to investing and have been curious why Netflix is constantly a best buy and one of your core stocks. If I followed your recent article on DCF models correctly, it would appear to me that Netflix's projected annual growth rate would have to be unrealistcally high for many many years just to justify its current valuation. Yet you suggest buying in expecting it to go even higher. Am I missing something?

    Darrell

  • Report this Comment On June 01, 2011, at 8:28 PM, wipster56 wrote:

    I agree to some extent with MKArch's position about the unsustainability of Netflix's current business model, but there is a large and growing larger number of my friends and their acquaintances that have signed off of cable and/or dish and use OTA HD network channels, plus Netflix and Hulu for all of their TV needs. Having entire series and great movies available at the touch of button, plus being able to get all new releases in BD form two days after they hit the stores is pretty damn convenient. And, the fact that older folks, the ones that don't like things to change, have become used to the way their system works is a pretty smart way to establish yourself as leader of the pack for any new offerings (as long as they work the same way). I do think their subscription rates will have to be tweaked a bit to keep the studios happy, but their costs of distribution now that both their virtual and media system are working well are very low. Because of the goodwill they've established, I believe Netflix will be the leader of the pack for quite some time and will end up being acquired by Amazon, Apple, or Google rather than each of these entities building their own distribution system.

  • Report this Comment On June 02, 2011, at 1:50 PM, verylargelarry wrote:

    Darrellwgray-

    Those buying into NFLX today are buying for the future winning possibilities of a proven thoroughbred. Save MKArch, no objective observer of this company would dispute the crashing success of this operation which invented this subscription based entertainment delivery channel and then made it the best, and then the cheapest, and is now taking it international.

    Note that the stock has been heavily shorted for over 4 years - at least 20% of the issue has been held short for all that time. The affect is that each time NFLX reports good news or huge subscriber gains, the stock goes higher, and the shorts must buy to end their losses. This forces the price even higher and makes the bulls even more happy to hold on to their positions. However, it also forces the issue into an overbought position.

    Were I to start accumulating a position today, I would try to identify support levels and wait for it to drop to that level(s), and to buy in thirds. The stock still has lots of life in it, but will show some dipsy doodles as well. Nothing goes straight up, always, yet this stock has for some time now. In addition to the chart levels, I closely monitor the short interest percentage, updated monthly at Yahoo.com (finance) under the tab of KEY STATISTICS for this stock. It is being driven by momentum and the persistence of the shorts has a lot to do with that. It is also driven by the news, and, hugely, the subscription rate of growth.

    The company is as solid as any company of the S&P. The stock valuation is trickier.

    Hope that helps!

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