Does This Stock Still Have the Edge?

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Back in October 2010 I took a look at Netflix (Nasdaq: NFLX  ) using Porter's Five Forces. For the uninitiated, Porter's model examines a company's competitive position through five lenses: barriers to entry, threat of substitutes, power of buyers, power of suppliers, and industry jockeying (also known as rivalry). I like it because it gives me a quick look at a company from a variety of perspectives in order to get a more holistic picture in regard to its competitive position.

What were the findings?
At the time I concluded, "While there may be some areas where the company could be somewhat vulnerable, I don't know that there is anything that can necessarily stop Netflix anytime soon." Of course time changes things, and Netflix is no exception. For the visually inclined, I like to rank Porter's model using colors. Green means the risk is low, yellow is moderate, and red is high. Of course it's not the be-all-end-all, but it's a nice quick way to take inventory of the situation. Let's see how things look today.

Barriers to entry -- RED
Netflix's bread and butter was DVDs through the mail. But it's a streaming world now, and DVDs will eventually go the way of the dodo bird. The trend has opened up this space to a slew of competitors as big boys like Amazon.com (Nasdaq: AMZN  ) and Google (Nasdaq: GOOG  ) attempt to steal some of the pie with their streaming options on Prime and YouTube. And as other players continue to build out offerings, consumers are going to have a lot of options from which to choose.

Threat of substitutes -- RED
The only thing that has changed here is the threat level; it's gone from red to super-red, and I don't know that there's much Netflix can ever do about this. Entertainment is a big field, and as technology advances I imagine there are only going to be more options out there. Netflix is going to need to lead the way, not follow. This is where I think CEO Reed Hastings gives the company a potentially big advantage.

Power of buyers -- RED
We saw a perfect example of just how powerful the buyers are in Netflix's case when the company rolled out its new pricing scheme and Qwikster idea. Subscribers couldn't hit the exits fast enough, and Netflix shareholders paid a very dear price in the process. Switching costs are nothing in this business, which means buyers hold a considerable amount of power here.

Power of suppliers -- RED
It's nothing new that content costs are going up. Before, Netflix could buy a DVD and rent it out until the cows came home, making a mint along the way. But streaming is changing everything. And make no mistake -- this isn't just a Netflix problem. Anyone who plays this game is paying more for content. That's why we're seeing companies like Netflix and even Hulu working with the content producers to develop their own original content. That Hulu is jointly owned by NBC and Walt Disney (NYSE: DIS  ) I don't think hurts its cause at all. And Netflix's original production Lillyhammer seems to have gotten a decent response from viewers thus far as well.

But it's not just content in this case. Netflix also has an interesting relationship with Amazon through Amazon's Web Services. From Netflix's recently filed 10-K:

Currently, we run the vast majority of our computing on AWS. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations and our business would be adversely affected. While the retail side of Amazon may compete with us, we do not believe that Amazon will use the AWS operation in such a manner as to gain competitive advantage against our service.

It might not always be this way though. Netflix's cloud architecture was designed so that it could have the option of moving to another provider down the road. The problem is that there's not another cloud out there that can give Netflix what it needs. Netflix management even said so. So for now at least, Amazon is a competitor and a supplier.

Industry jockeying -- RED
Again, the only thing that has changed here is the shade of red. It's more competitive now than ever before. Even Verizon Communications (NYSE: VZ  ) is getting in the game through its partnership with Redbox. The competition is great for consumers. But for the players, it makes every move that much more critical.

I said "with all due respect"
Sometimes I get the feeling that when I criticize Netflix I'm offending people. If I am, well, they'll get over it. The way I see it, this race is just getting started and the path to success for Netflix is not as clear as it once seemed. The brand and convenience factors hold a lot of sway for sure, and that's important. But to ignore the plausibility that there are better options out there in the making could be fatal for investors. The good news is that there's plenty of room for multiple winners. Now we just need to figure out who those winners are going to be.

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Motley Fool Stock Advisor analyst Jason Moser owns shares of Amazon.com. The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services have recommended buying shares of Google, Amazon.com, Netflix, and Walt Disney. 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.


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  • Report this Comment On February 21, 2012, at 11:15 PM, funspirit wrote:

    I like this article, simple and common sense as they should be :)

    Good job!

    for a look at how tech has supplanted gold as a store of value, try here-- specifically Google and Apple, big potential netflix competittors try this

    Why Your Gold is Worth(less)- Google It---

    http://beta.fool.com/funspirit/2012/02/17/why-your-gold-wort...

  • Report this Comment On February 22, 2012, at 10:40 AM, jennyswave25 wrote:

    Netflix has a long road ahead to win back the confidence of the people it offended. I dropped their service too because the list of streaming videos was comprised of terrible '80's and 90's B-flicks. And that's tough for me to say, given that I happen to like most '80's low budget movies. I receive "please come back to us" emails frequently, but I almost wish they'd send an "I'm sorry we suck" email with a "p.s. here's a complementary box of Godiva." For that, I might reconsider.

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