With the TV landscape facing substantial upheaval, media and entertainment investors and analysts are understandably jumpy these days. Dish Network's recently-launched Sling TV offering could one day be memorialized as the snowball that started the avalanche that overtook the cable industry, although other tech names like Sony and Apple are also close to launching their own over-the-top services as well.
One analyst recently asserted that that this sea change could present potential challenges to streaming giant Netflix (NFLX -0.62%), whose stock appears to have been snake-bitten over the past month.
However, I believe this analyst's rationale simply misses the mark. Here's why.
Netflix on the chopping block?
I tend to follow analyst commentary on tech and telecom companies as closely as possible, and earlier this month, I took particular interest in a downgrade of Netflix stock from Evercore's analyst Ken Sena. Citing increased competition from the likes of Dish, Apple, and Sony, among others, Sena ratcheted back his price target on Netflix nearly 20%, from $450 to $380.
Suffice it to say this just doesn't add up for me.
Perusing the note to investors, Sena sees an "intensifying competitive environment necessitating increased investment with uncertain return." There's probably some truth to this. In a world where you have technology companies with buying power on the scale of Apple's or Sony's, you can certainly envision any number of "bidding war" scenarios that could cause Netflix to overpay for or walk away from compelling content. But while relying on historical precedent is by no means a surefire basis for prediction, Netflix has navigated similarly competitive scenarios in the past .
Competitive advantages at Netflix
To me, souring on Netflix shares for the reasons above misses both how the core use case for Netflix has evolved over the years and its long-term growth runway.
Source: Netflix
For starters, as new entrants like Amazon and Hulu have developed compelling streaming offerings of their own, Netflix has had to find new ways to differentiate its service from the low-barrier-to-entry business of streaming pre-existing content. Thankfully, by adroitly pivoting into creating its own original content, Netflix has found a recipe to create something no other streaming product can offer. It's a difficult but tried-and-true differentiator, and an advantage that Netflix thus far has proven quite adept at leveraging.
It's important to note that original content isn't necessarily a silver bullet solution. There's undoubtedly something of a "reversion of the mean" risk in this strategy, as we saw with the balmy critical receptions of more recent Netflix series, like "Marco Polo". However, Netflix has broken new ground with its original content strategy and demonstrated an ability to attract talent and replicate this success over multiple seasons. At this point only HBO and Amazon are in the same league as Netflix in terms of vertical content integration, which should help Netflix remain distinctly separate as over-the-top TV grows in prominence.
The second advantage that Netflix enjoys is its budding international presence, which remains light years ahead of its competition. For context, Hulu Plus remains operational only within the U.S, while Amazon Prime Instant Video operates in only five markets. On the other hand, Netflix revealed around 50 countries in which its service is available in its most recent earnings release.
Perhaps more impressively, Netflix stated that it believes it can grow its number of markets to around 200 by 2017. And while many of those markets will likely be unable to make a meaningful impact on Netflix's swelling subscriber base, Netflix will have positioned itself to capitalize on the increased ability of consumers globally to stream video content over the course of the next few decades. Of course, a company with the global reach of Apple could potentially match Netflix's international reach virtually overnight if it truly wanted. However, given what we know about the scope of Apple's rumored TV offerings, it seems likely its services will prove sufficiently different to not directly target Netflix. I don't see Apple as the "Netflix killer" it's been billed as at times.
In the abstract, new entrants in any market imply increased competition for the incumbents. However, in a real world context, you have to look at the more subtle factors that separate each offering, and I absolutely believe that will hold true with the likely proliferation of Internet-based TV and movie offerings. Because while it might make for great press to say that Apple or Sony or Dish will finally be the company to sink Netflix, I believe Netflix remains strongly positioned to succeed for plenty of years to come.
