Amazon.com, Inc. and AT&T Inc. Are Telling Us Something About Netflix, Inc.

Amazon and AT&T's recent moves in the video streaming business tell us one thing about Netflix.

Apr 30, 2014 at 3:50PM

Enormous companies like Amazon.com Inc. (NASDAQ:AMZN) and AT&T, Inc. (NYSE:T) often use acquisitions to enter new industries. Amazon and AT&T in particular have historically been very acquisitive, yet strangely both have decided to enter the video streaming business to compete with Netflix, Inc. (NASDAQ:NFLX) by themselves without making any sizable acquisitions. While there is nothing wrong with this approach, it might indicate how AT&T, Amazon, and the long list of other companies which have entered the space view and assess Netflix. In retrospect, this might have great importance for Netflix shareholders as the video streaming space becomes increasingly competitive. 

Amazon grows larger and makes its mark
Amazon has been in the video streaming business for a short period of time. That being said, its Prime Instant Video has grown rapidly and the company has invested hundreds of millions of dollars in TV shows and movies for Prime members. The company now has a library that consists of tens of thousands of Prime Instant Video titles along with more than 200,000 titles for purchase or rent.

With this kind of service, Prime Instant Video provided three times as many streams as it did in 2012, yet it still accounts for just 3% of the video streaming market. Apparently, the company is working hard to grow its market share. On Wednesday it announced a new licensing agreement with HBO, which marked the first streaming-content deal for HBO. Hence, this deal gives Amazon something that Netflix lacks, thus making the battle for subscribers that much more intense.

AT&T finally gets into streaming
The telecom giant AT&T is prepared to start from scratch to create an ad-based subscription streaming video service. The company, along with its partner Chernin Group, will acquire, invest in, and launch this service with a $500 million commitment.

What's interesting about this deal is that it comes at a time when AT&T is making real strides to become the top broadband provider in the U.S. with a download speed of one gigabit per second, which is up to 100 times faster than average broadband speeds. Hence, a bundle that combined this service with streaming might be attractive to AT&T's customers, and with these speeds customers would be able to view content at a rather fast pace without service interruptions.

Lastly, and perhaps most importantly, Chernin and AT&T attempted to enter the streaming space last year with a bid for Hulu. The bid never materialized, and now AT&T and Chernin are taking an alternative route.

What does this have to do with Netflix?
Netflix is the king of the video streaming space, where it commands a 57.5% market share and has more than 35 million monthly subscribers and content obligations that exceed $7 billion. Therefore, Netflix has a big head-start on its competitors in content, subs, and market share. As a result, if these large corporations are really serious about becoming relevant in the video streaming market, why not acquire or partner with Netflix?

With that said, shares of Netflix are rather valuable right now with the company valued at $21 billion, but this is a stock that has been very volatile over the last three years. At its cheapest point in 2012, Netflix had a valuation of less than $4 billion. Therefore, its content, subscribers, market share, and infrastructure could have been acquired for a rather cheap price.

Thus, considering the lack of interest from large companies that are making big investments in this space, we can assume quite a few different things. Perhaps peers consider Netflix too expensive? Maybe they feel that Netflix has a disadvantage in making content deals so it cannot keep making deals at its current rate and stay profitable; its operating margin has declined from 11.7% to 5.2% in the last two years. Lastly, peers may think that the market will continue to become more fragmented as more companies enter the industry, so they may plan on taking customers from Netflix instead.

Final thoughts
Either way, another company has not acquired or partnered with Netflix and there are no meaningful rumors of an acquisition amid large investments in the space. For investors in Netflix, this isn't a good sign. Investors might want to follow the lead of the big money, which has an inside glimpse into this business, and stay away from Netflix.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. 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 has a disclosure policy.

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