Plans for a free video streaming service for "average Americans" apparently remains on the drawing board for Costco (NASDAQ:COST), a service it believes could build additional value into its warehouse club membership. Yet Walmart, which already owns Vudu, correctly decided against coming out with a second branded service that would also target middle America, Costco investors would be better off if it shelved its plans, too.
What can it do differently?
There is certainly no shortage of streaming outlets to choose from. Beyond Amazon.com and Netflix, consumers can also select services from Roku, Hulu, SlingTV, and YouTube TV.
And more will be coming soon. Disney is launching Disney+ this year; AT&T, Comcast, and Apple are considering their own services; and Elon Musk even has dreams of streaming from space. Discovery also keeps teasing one.
There's nothing Costco can bring to the table that will improve upon what's already in the marketplace, but it can damage its own finances by doing so.
As my Motley Fool colleague Adam Levy points out, by tying a streaming service to its higher priced executive-level membership, Costco would have the opportunity to help regular-tier members migrate upward, potentially generating millions of dollars in additional membership fees.
But a Costco streaming service would not give members anything to make them want to cancel their existing Netflix or Amazon Prime service. Data from Statista indicates 60% of U.S. adults have a Netflix subscription or watch Netflix using the service from someone in their household, and Amazon has over 100 million members. That likely blankets virtually all of the potential subscribers for a Costco service.
A costly gamble
Increasingly, the benefit of a Netflix or Prime Video account isn't in the videos that can be streamed from the studios, but in the original content the individual services are producing, the quality of which is constantly improving.
Last month, Amazon Studios won two Emmys for its series "The Marvelous Mrs. Maisel" and "A Very English Scandal." Amazon's programming received nine nominations. Netflix also received accolades, winning eight nominations for television programming and five in film.
The reason for the improved content and the recognition that both services are receiving is that both are willing to invest substantial amounts of money. Amazon spent a reported $5 billion in 2018 while Netflix was shelling out $13 billion. To give its customers anything of value, Costco would have to commit a sizable sum, not only for content acquisition, but also for content creation.
Although Costco has been enjoying rising sales of late, its profits are being pressured. While much of that is separate from its retail business (much of it was due to rising gas prices and changes to revenue recognition policies), a streaming service could further erode profits with no real payback.
Check out the latest earnings call transcript for Costco.
The key investment takeaway
Costco isn't a movie studio, nor is it a streaming service provider. It shouldn't become either. It is a retailer and needs to focus on that business to better contain costs and drive sales higher. Adding a streaming service would only be a distraction and would divert resources from its main business.
Walmart smartly gave up on its idea that it needs to battle Amazon on every front. Costco investors would be better served if the warehouse club did so as well.