Some people have pointed out Netflix (NFLX -3.92%) as a friend of old-school TV, but that depiction is misleading. Just like how online travel sites are replacing traditional travel agencies, online video streaming sites could replace television networks. Netflix is dominating a market that traditionally belongs to companies such as AMC Networks (AMCX -0.60%) and Time Warner (NYSE: TWC). It is able to accomplish this because it provides a mix of commodity content on a non-exclusive basis, as well as exclusive and original content. However, Netflix will have to continue capturing market share from television companies to increase its revenue. So how is Netflix stepping up in the TV industry?
The growth of smart TV
As more households purchase smart TV's, video streaming companies such as Netflix are set to benefit from the technological trend. But they will need to differentiate their services to remain competitive. In order to maximize the engagement of viewers in its original contents, Netflix relies on data analysis, which the company does by collecting information from users. Though content creation is a new undertaking for Netflix, each of its original shows debuted to a higher first-week viewership than its predecessors.
Netflix is also trying to allow users to stream videos directly to Apple's TV set-tops. Netflix is also bringing high-definition video to iPhone and iPad. Additionally, Netflix released an update to its Android app that delivers videos compatible with Nexus 7 tablets. Netflix removed the lag that plagued its Android app and created a less obtrusive interface for an easy access through the lock screen.
Strategic expansion
Some TV companies have reacted to Netflix's intrusion with strategic moves to expand operations internationally. For instance, AMC Networks recently announced the acquisition of Chellomedia for $1 billion. The acquisition allows AMC Networks to enhance its scale in nations such as Poland, Netherlands, Spain and Hungary. With the deal, the affiliate subscribers of the company will increase to 500 million, and the deal will increase the company's total revenues by around 25%.
Time Warner will acquire DukeNet Communications for $600 million in cash. DukeNet offers bandwidth services to customers and is co-owned by Duke Energy Corp. and Alinda Capital Partners, each with a 50% stake.The financial terms of the deal include Time Warner's repayment of all outstanding debts of DukeNet. The deal closes by the first quarter of 2014, subject to regulatory approval. Time Warner also collaborated with Comcast to accelerate the development of new video platforms, which will enable even more video playing devices.
The foolish takeaway
With more than 40 million subscribers on its platform, Netflix is an important player in the TV sector. To defend against Netflix, television companies are investing in acquisitions and new video platforms. Netflix is responding by innovating its platforms and purchasing exclusive content. After its domestic success, growing internationally is a challenge to the company. However, if Netflix increases the amount of original contents it streams, it will improve its top line performance.
