Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Netflix Stock Is No Safe Bet

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

How is it that a company with explosive growth can be under pressure to make any sort of profit? That's the position Netflix (NASDAQ: NFLX  ) is in as a distributor of streaming content, but an owner of very little content itself.

NFLX Revenue TTM Chart

NFLX Revenue TTM data by YCharts

As Amazon (NASDAQ: AMZN  ) and Netflix expand, they'll continue to fight for content, as they've done in recent months, and neither will make a significant profit from streaming. But the bigger problem is that neither company has any real competitive advantage in streaming. Content owners still hold all of the valuable assets and, if they're unhappy with the prices being offered, they can build streaming networks themselves.

The ebb and flow of content shows just what an up-and-down business this is. Netflix's deals with Warner Bros., MGM, Universal, and Viacom expired earlier this year, and thousands of titles vanished from the company's offerings. Viacom packed up and went to Amazon, who was likely willing to pay more than Netflix.

It's a vicious cycle that both Netflix and Amazon are playing. As they add subscribers, content owners demand more money, which brings more subscribers and higher prices for content. There's never any room left for a profit.

Packing their bags
The biggest leverage content owners have is building their own apps and replacing Netflix. HBO Go has proven it can be done, and Time Warner is certainly using it as a test ground. Disney's ESPN subsidiary also has a successful app called Watch ESPN, which is now available on most mobile devices and Apple TV. Warner Bros. has even started a streaming service called WB Archive Instant, another content-backed competitor.

I think we'll only see more of this in the future, particularly as cord cutting becomes a more viable option. Content owners will need a way into your living room, and developing apps is a high margin way to do this.

Changing the business model
If Netflix is going to compete with cable and content owners, it will have to build a different business model. The $7.99 all-in-one model simply isn't going to work forever.

The deal the company signed with Disney at a reported $300 million per year may be their opportunity to do just that. The content will be new releases, which command a premium in today's market on Starz. There's also the possibility that smaller content owners, like CBS, could create mini-channels on Netflix, and leverage the company's wide distribution network.

The bottom line is, for Netflix to survive, it's going to have to adapt to content owners creating their own distribution networks. That will require a flexible business model, something Reed Hastings has resisted to this point.

Netflix stock isn't the best bet in media
When you look at the profits of media companies and streaming providers, it's clear that content is the best investment in media, not Netflix.

NFLX Net Income TTM Chart

NFLX Net Income TTM data by YCharts

Without a paradigm shift in business model, I think the company will continue to feel pressure on the bottom line, particularly as Apple, Microsoft, and others expand apps in the living room. The long-term trends simply aren't in Netflix's favor.

The Motley Fool's new free report, "Who Will Own the Future of Television?" details even more about the risks and opportunities in TV. Click here to read the full report!

Read/Post Comments (1) | Recommend This Article (0)

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 June 28, 2013, at 12:57 PM, jb757 wrote:

    "If Netflix is going to compete with cable and content owners, it will have to build a different business model."

    Haven't you heard? Netflix is already adding more subscribers than all of those competitors combined. All they need to do is keep it up.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2514459, ~/Articles/ArticleHandler.aspx, 8/27/2016 2:50:02 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 17 hours ago Sponsored by:
DOW 18,395.40 -53.01 -0.29%
S&P 500 2,169.04 -3.43 -0.16%
NASD 5,218.92 6.71 0.13%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/26/2016 4:00 PM
NFLX $97.58 Up +0.26 +0.27%
Netflix CAPS Rating: ***
AMZN $769.00 Up +9.78 +1.29% CAPS Rating: ****