Tom Gardner on What's Next for Netflixhttp://www.fool.com/investing/general/2011/10/26/tom-gardner-on-whats-next-for-netflix.aspx Tom Gardner
October 26, 2011
The following post was originally published Monday night for premium members of The Motley Fool's flagship newsletter, Stock Advisor.
I'd like to share some of my greatest areas of enthusiasm and my biggest fears about Netflix (Nasdaq: NFLX ) today. It wouldn't be right to start anywhere but with the fears, given the performance of the past few months and the market's reaction to this evening's earnings release.
My fears about Amazon are that, with its Prime membership, it's relatively effectively replicated what Netflix is offering. True, Netflix has a deeper portfolio of content. True, Netflix is embedded in many more devices. But how sustainable are those competitive advantages? How long will it be before Amazon is on a huge number of devices, with an equally deep library of content -- all of which is also accessible via the Kindle Fire? Finally, remember that Netflix is essentially hosted in Amazon's cloud services, AWS.
It certainly looks like Amazon is busily replicating what Netflix has built out, alongside its offering of individual movies to buy or rent. And it's all bundled into a price that includes other core benefits (expedited shipping). With its balance sheet strength, Amazon could continue to strengthen its Prime offering so movie rentals into the home look essentially free.
My fears about Apple aren't anywhere near as immediate. Apple is engaged in larger device battles. But when it brings its pocketbook into content bidding in its attempts to own home network and entertainment offerings, the company just puts more and more upward pressure on content pricing. That will hurt Netflix in the long term.
So you've got two big dudes in the mix. They've got much more money and highly diverse businesses -- that allow them to run low-margin, maybe even unprofitable, competitive offerings to Netflix -- and I'd throw in that with all the economic turmoil, I don't think the government will have the appetite to look for anti-competitive practices very aggressively these days. On the face of things, Netflix is in real trouble. So ...
Areas of enthusiasm
Netflix should have -- and still should -- try to migrate members to their streaming services. To do that, it needs deep attachments with subscribers AND a shiny beloved brand. So why am I listing this as an area of enthusiasm? For two reasons:
Examples might include: deals to show certain high-quality smaller films for free at Netflix.com, announcements of new content partnerships to the extreme (not every deal has to be a large content provider -- Netflix needs to create momentum by announcing many small deals, each of which will be a PR event in today's climate), and deals with film schools to showcase their best work (Netflix needs to get on the side of filmmakers around the world).
What seem like small-potato offerings can build momentum around Netflix's brand -- and head into the holiday season with a new story forming. "Netflix gives thanks to its customers and to the world with the following gifts..."
(2) Netflix is making inroads internationally.
(3) Netflix has held onto 23 million paying members through a communications fiasco. If they can make people feel good about being Netflix members again, this core base of paying members is valuable beyond today's share price. It certainly becomes attractive to a potential buyer that feels like it has fallen behind -- e.g., Microsoft<