Do We Really Need Netflix?

Netflix (Nasdaq: NFLX  ) has made a number of mistakes in the past six months. It instituted a price increase that rubbed customers the wrong way, the Qwikster announcement was a complete debacle, and the reversal has only partially helped heal those wounds.

But more troubling for Netflix may be the company's long-term strategic position. Netflix is really nothing more than a content-delivery company -- the next-generation cable company if you will. But as Netflix transitions away from DVDs to streaming, its competitive advantage disintegrates as well. DVD delivery requires infrastructure that content providers have no interest in owning, just like cable companies, and the model was beneficial for customers and suppliers.

But the streaming business is completely different. There is little differentiation between what Netflix does and what content providers could do.

Most content providers already stream content on their own websites, and the software to expand that isn't rocket science. Disney (NYSE: DIS  ) , News Corp. (NYSE: NWS  ) , and Comcast's (Nasdaq: CMCSA  ) NBC already created Hulu, Netflix's direct competitor, so why couldn't they do it for themselves?

The only real advantage Netflix has right now is that it's already integrated into a plethora of electronic devices. But with Apple's (Nasdaq: AAPL  ) iOS and Google's (Nasdaq: GOOG  ) Android platform taking over many devices, creating apps for devices is a piece of cake.

How quickly fortunes can change
So why do we need Netflix? As much as I may dislike paying my cable bill each month, there's a reason I do it. Cable is the only way to get the content I desire. Netflix doesn't hold the same kind of strong position in our everyday lives. If the cable cord is made obsolete, is there a reason Netflix will be needed in the future instead of just going straight to the source?

Netflix's financial results may tell the whole story. Despite strong subscriber growth in the past, gross margins have been falling, domestic churn is increasing, and the company is expecting to lose subscribers in the third quarter. Net exactly the direction a company should be headed.

To buy or not to buy?
Netflix has been a favorite of our Motley Fool Stock Advisor newsletter team for year, with smashing success. But I have to disagree with their premise that the company will play a central role in our media-content future. Netflix doesn't do anything that content providers could do if they choose to, and with most media contained in a handful of companies, I see consumers going straight to them in the future.

Agree or disagree? Let me know in our comments section below.

Interested in reading more about Netflix? Add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium is a newly renewed subscriber to Netflix for a short-term run and owns shares of Disney. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Netflix, Google, and Walt Disney and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


Read/Post Comments (7) | Recommend This Article (4)

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 October 22, 2011, at 11:27 PM, TCNFool wrote:

    I completely agree that Netflix is very vulnerable to competition. For reasons, see my last post on the topic. http://boards.fool.com/1081/i-have-read-this-and-many-other-...

  • Report this Comment On October 23, 2011, at 7:27 AM, dmbenitez wrote:

    Their key differentiation has been their movie queue. If they can "explode" this through social media and make it the preference sharing site, they may have something. However, this is not enough for a site like Pandora, so I am not sure if it will work for them

  • Report this Comment On October 23, 2011, at 8:18 AM, MKArch wrote:

    They have no differentiator except a cheap as dirt subscription price. AOL should have been a lesson that it's easy to get tons of subs to give a cheap as dirt service a spin but it's a whole different ballgame keeping them coming back year after year. They lose subs in droves and the number walking is steadily increasing. Only ever increasing numbers of new subs taking their place is masking this massive churn, look out below when they saturate the U.S. which is not far off. In the end it's all about content, content, content and they can't afford anything but tv re-runs and ancient movies all of which is coming to tv everywhere soon. I'm glad to see someone at TMF sees through this "House of Cards".

  • Report this Comment On October 23, 2011, at 10:26 AM, chopchop0 wrote:

    They have no moat outside of their DVD rental infrastructure. I've made plenty of caps points shorting them a few months ago because of that.

  • Report this Comment On October 24, 2011, at 12:03 PM, nick1200 wrote:

    I'm still a fan of NFLX. I still think it offers the best content in the easiest away.

    I expect to see NFLX shares pop after their earnings report tonight.

  • Report this Comment On October 24, 2011, at 7:13 PM, uview wrote:

    OctoramaPoll: Netflix lost 800,000 U.S. subscribers in one quarter, and Netflix shares plunged 27% in after-hours trading. What should we learn from this?

    Vote or see What's on people's mind http://octorama.com/desktop/display-1752

  • Report this Comment On October 25, 2011, at 3:28 PM, mikemorel wrote:

    Your conclusion:

    Netflix doesn't do anything that content providers could do if they choose to, and with most media contained in a handful of companies, I see consumers going straight to them in the future.

    Is incorrect.

    Studios need aggregators/resellers, whether online or at B&M shops. Consumers don't want to shlep over to Warnerbros.com to rent "The Hangover 2", and then have to head on over to Disney.com to rent "Cars 2".

    They want one place with all their content on it. Like iTunes. Or Netflix.

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