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I Was Wrong About Netflix

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Before I began thinking about Netflix (Nasdaq: NFLX  ) as an investment, the company was just a joyful experience for me -- its signature red envelope dropping through the mail slot once or twice a week as I happily made my way through my ever-growing online movie queue. In the course of writing about Netflix and its surging competition, however, my viewpoint has, sadly, shifted from romantically bullish to realistically bearish. Here's why.

It's a jungle out there
And the king of the jungle is (Nasdaq: AMZN  ) . For the moment, and into the foreseeable future, Amazon is Netflix's biggest competitive threat. Amazon has its fingers into just about everything, giving it a significant market-space advantage. With trailing twelve months' gross revenue of just over $48 billion versus Netflix's $3.2 billion, Amazon can take its sweet old time developing its own fledgling movie service, Prime Instant Video; negotiating content deals from a position of relaxed confidence; and taking a more thoughtful, considered approach overall.

Alternatively, Netflix has its fingers in exactly one pie. Whether by wire or post, delivering media is the company's only way of generating revenue. It stands or falls based on how well that single channel of profit is doing. As such, it will need to scramble to keep up, which is never ideal.

Slow and crushingly steady wins the race
Amazon has taken full advantage of this revenue-diversity gap. Prime Instant Video is a feature of Amazon Prime, which, for $79 per year, gives members free two-day shipping on a vast number of physically deliverable items in the company's extensive inventory. They also get free access to Amazon's video-streaming catalog, which the company is slowly but surely building up to a competitive level of content.

Most recently, Amazon signed a licensing deal with Viacom, owner and operator of Nickelodeon, VH1, MTV, TV Land, Spike, Logo, BET, and Comedy Central. This deal will let Prime members choose from thousands of shows from these channels, in addition to the films and television shows already available from Warner Brothers, PBS, CBS, Disney-ABC, Fox, Sony, and NBC. The Viacom deal brings Amazon's grand total of instant-streaming titles to a formidable 15,000.

Don't mind us looking over your shoulder
But enough about Amazon, because there are even more sharks circling the lone swimmer Netflix -- sharks that, sooner or later, are going in for a bite. Apple (Nasdaq: AAPL  ) , for instance, has this little thing called Apple TV, a box you connect to your television that lets you stream video through iTunes.

If you've never heard of Apple TV, join the club. The company has yet to put a major effort into developing and marketing the product. CEO Tim Cook even went so far as to recently quip: "Our Apple TV product is doing quite well … but in the scheme of things, we still classify Apple TV as a hobby." 

Apple's casual attitude is excellent news for Netflix, because as soon as Apple decides to take Apple TV beyond mere hobby-dom, Netflix will have another fiercely competitive threat on its hands, one with more than $127 billion in TTM revenue -- diversified across the wildly profitable iTunes and the most sought-after consumer-electronic devices in the world -- and close to $100 billion in the bank.

Apple doesn't necessarily invent the next big thing, but instead takes an already existing good idea, like video-streaming, and then does it market-crushingly better than anyone else.

I want my Google TV
(Nasdaq: GOOG  ) has its own version of Apple TV called, not surprisingly, Google TV. Like Apple, Google hasn't yet made Google TV a priority. But also like with Apple, when Google does decide to make it a priority, the company has the size, reach, and financial firepower to become a very serious threat to Netflix very quickly.

Not having all one's eggs in one basket counts. Look at Barnes & Noble (NYSE: BKS  ) . The once-mighty bricks-and-mortar bookseller is slowly but surely losing its business to a greatly diversified competitor, (speak of the devil) Amazon. Had B&N been able to get beyond mere books and music in the same way Amazon did, it might not be trapped in the corner it is today. Netflix can relate, or rather, will be able to soon.

Don't despair just yet, Fools
The company, for now, is holding its own. It's not like Netflix doesn't get it, or isn't making the right moves -- I just don't think, given the existing competition and what is surely coming, the company will survive past the next few years, at least not on its own. In the meantime, I'm going to keep enjoying that beautiful red envelope -- and all it represents to me personally -- sliding through the mail slot, and keep dutifully paying my Netflix bill every month until I'm properly wooed away.

Netflix, you shall be missed, but don't despair, Fools. Here's something to cheer you up: Learn about another company, like Netflix in its heyday, set to change the way the world does business -- this time in the exploding sector of data mining and business intelligence -- in this free Motley Fool special report: "The Only Stock You Need To Profit From the NEW Technology Revolution." Get your copy while the stock is hot by simply clicking here now.

Fool contributor John Grgurich, sometimes reduced to staring contests with his German Shepherd for entertainment on a Saturday night, could use some revenue diversification himself. Neither John nor his canine colleague owns shares in any of the companies mentioned in this column.

The Motley Fool owns shares of Apple, Google, and Motley Fool newsletter services have recommended buying shares of Apple, Google, Netflix, and; and creating a bull call spread position in 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. The Motley Fool's disclosure policy is a perfectly scintillating read.

Read/Post Comments (6) | Recommend This Article (16)

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 February 23, 2012, at 8:12 PM, jtmkmfool wrote:

    Or as my postman says... "you have a box from Satan" (Amazon)

  • Report this Comment On February 24, 2012, at 9:26 AM, XMFGrgurich wrote:

    Ha ha. Very nice.

  • Report this Comment On February 24, 2012, at 11:21 AM, kdar1987 wrote:

    Bought few shares @122 and not sure if I should hold it now or not.

  • Report this Comment On February 24, 2012, at 3:01 PM, lucasmonger wrote:

    @jtmkmfool - not sure if Amazon is considered as evil as Google is.

    @kdar1987 - Economics 101 by Father Guido Sarducci... "Buy and sell for more." So if you bought at $122, don't sell until it is above $122. Don't worry about this recent dip at about $111 as Netflix is still the current leader in streaming and DVD rentals. Hold until you at least break even.. hold even longer if your'e a little greedy, then get out when you feel that you've made enough and don't want to stay in the hunt any more.

    I avoided Netflix for a long, long time because I didn't like the >$100 price. Even though it climbed to over $200, it subsequently dropped to $87 and I piled in. I plan to stay in until it hits $150-200 then I'll re-evaluate whether I continue to hold or whether to sell and look for another investment.

  • Report this Comment On February 25, 2012, at 10:27 AM, germaineanne wrote:

    Netflix may have at least one new customer -- me! Our brick-and-mortar Blockbuster is closing in April. Ugh. Any thoughts on redbox?

  • Report this Comment On February 25, 2012, at 11:49 AM, accelerando wrote:

    It's weird how no one sees the forrest here. Netflix is, long term,dead. It has no shot whatsoever. Not only that,no one is going to make all that much money in streaming video except the folks who create the content. Not apple. Not google. Not amazon.

    PORN. PORN. PORN. The porn model will inevitably triumph. There is no possible way it won't -- that is the model where there are any number of 'aggregators', each having access to close to the entire existent library and each selling consumers streaming access to this library on a 'pay per minute' basis. The content creators sell access to the new work,then allow each of the aggregators access after they deem the initial buzz has worn off.

    How can hollywood and bollywood and everyone else who makes movies not follow suit? It has to be way more profitable for them. How can netflix or amazon or even mighty apple prevent this? I don't think they will be able to prevent this 'multiple sellers' of effectively the same library situation.

    The problem will rapidly become that there is no barrier to entry. The software that creates a porn aggregator sight like aebn is easily acquired and almost certainly dirt cheap. aebn cannot prevent anyone from competing on equal terms. And pretty soon, netflix will be in exactly the same pickle, except they have a multi-billion dollar market cap and thousands of employees (would imagine aebn probably has less than a hundred employees) to protect.

    Look for netflix to be trading in the low teens or single digits within two years.

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