You Need Netflix More Than It Needs You

On Friday, Netflix (Nasdaq: NFLX  ) managed to close above $60 for the first time this month.

It didn't last.

Variety raised doubts this morning that Netflix's streaming deal with A&E and History Channel won't be renewed before the original contract ends this Friday. Adding insult to injury, Macquarie analyst Tim Nollen initiated coverage of the company today with an underperform rating and a $50 price target.

Ouch.

Nollen's argument is that investors are better off going with the content owners than with the distributors. "Content is king" may be a tired mantra, but Nollen thinks it will be media giants including Time Warner (NYSE: TWX  ) and CBS (NYSE: CBS  ) that "rule the roost" here.

"Netflix is a price taker in an increasingly competitive market," he argues.

Throne for a loop
Time Warner is the parent of HBO. CBS owns Showtime. One can argue that they started out a lot like Netflix. Cable providers continue to market HBO and Showtime as premium movie channels -- which is pretty much what Netflix was during its disc-intensive model.

However, HBO and Showtime began to learn that owning content -- especially recurring content in the form of television shows that can push the envelope the way traditional broadcasters can't -- is the smarter path to retention.

The third season of Boardwalk Empire premiered on HBO last night. If you wanted to catch Weeds before its finale, you needed Showtime.

Does anyone care if HBO or Showtime misses out on a particular movie? No. Do they care that obscure A&E and History Channel shows have never been available? Of course not. However, Netflix's stock still takes a whack whenever a cable channel or studio deal falls apart, even if it will ultimately improve margins if subscribers stick around.

Spoiler alert for cynics: Netflix subscribers stick around.

Seeing Starz
Liberty Media (Nasdaq: LMCA  ) cut off a lucrative deal with Netflix in February, and Netflix shares have taken a beating since Starz let its intention known last year. Did subscribers follow the stock price out the door? No. Netflix has actually tacked on nearly 2.3 million net streaming subscribers in this country through the first half of the year.

There are now nearly 24 million domestic Netflix streaming subscribers. Netflix's more than 27.5 million global streaming subscribers represent a figure comparable to the leading premium movie channels. Why are folks willing to pay twice as much for HBO or Showtime than Netflix? Why are they willing to pay far more for the cable and satellite television services required before they can add Showtime or HBO?

If "quality original content" is your answer, have you seen the Netflix playbook? Netflix's foray into original programming got off to a slow start with February's Lilyhammer, but we have the Arrested Development revival, the star-studded House of Cards, and Eli Roth's Hemlock Grove on tap for next year.

Maybe Netflix is taking the wrong path by making entire seasons of its shows available at once, the way it did with Lilyhammer. It wants to encourage what it calls "binge viewing" instead of creating the buzz that builds for hot shows with weekly installments.

In the end, it doesn't matter. Netflix has proved that it's flexible enough to shift gears when something isn't working. Just look at Qwikster, which lasted about as long as a Kardashian relationship.

If skeptics think that investors will bail on Netflix just because they can't watch old episodes of Hoarders, they're wrong. Just wait until Netflix has just one original-programming hit and learns to milk it appropriately.

When you have more than 27.5 million premium streaming customers worldwide, you're going to find that you can not only pay more to score magnetic content, but you can also pay more to acquire quality content. Amazon.com is giving Netflix a good fight as it follows the Netflix blueprint circa 2009, but Netflix is already catching up to the audibles that HBO and Showtime are calling.

Good luck betting against Netflix.

Stream on
A new premium report on Netflix details the opportunities and challenges in store for its shareholders. The report includes a full year of updates, so time's ticking. Check it out now.

The Motley Fool owns shares of Netflix and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com and Netflix and creating a bear put ladder position in Netflix. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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


Read/Post Comments (5) | 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 September 17, 2012, at 11:29 PM, millsbob wrote:

    actually, i can do just fine without Netflix, and cut them loose 2 months ago. from anecdotal evidence, i'm not the only one finding the service growing stale.

    oh, you meant the Stock?

    you've got a bad case of confirmation bias, Rick.

    very, very glad i didn't get into this one when the Fool was still pushing it at close to 300. betting i'll be just as happy a year from now.

  • Report this Comment On September 18, 2012, at 1:26 AM, kthor wrote:

    netflix is boring, I don't need it!

  • Report this Comment On September 18, 2012, at 8:24 AM, SteveMetsFan wrote:

    I like Netfix--both its streaming and DVD service. I ditched HBO and Starz several years ago. The stock? Who knows?

  • Report this Comment On September 18, 2012, at 10:10 AM, Tricaz wrote:

    I found Netflix (instant movies) to be extremely out of date, so when they raised their price, I dumped it. I think they really need to get current to be a competitor in this market.

  • Report this Comment On September 18, 2012, at 4:23 PM, rhealth wrote:

    "Spoiler alert for cynics: Netflix subscribers stick around."

    Yep. So Netflix doesnt have every new movie i can possibly dream of on streaming, I have about 30 interesting movies and shows in my cue right now. Netflix also knows what I like and makes it easy to browse by category. Amazon prime has to bribe you with superlow prices and free shipping to get you to use their horrible interface. No thanks.

    As for cable, you can keep that too. I've had enough of New Jersey housewives and Rob Schneider in a dress for this lifetime!

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