I've been going back and forth in time this week, checking in to see how some of the biggest companies that I follow are holding up in 2014.
Today I'm taking a closer look at the country's favorite flick flicker: Netflix (Nasdaq: NFLX). As you can imagine, in 2014 it's no longer uncontested as the leading provider of streaming video content. Rivals got smarter, but Netflix did too. Studios wrestled back control over distribution, but they underestimated Netflix's grip on the couch potato.
Let's go in for a closer look.
Three years later
Cable isn't dead, but cord-cutting continues at an alarming rate. Even rural pockets of the country will soon be canvassed by cheap and fast connectivity. The cable industry players still standing either followed Comcast (Nasdaq: CMCSA) into content with its 2011 NBC Universal deal or have bowed to streaming competition and now deliver true a la carte plans. If all you want is Nickelodeon, ESPN 6, and Discovery Channel, that's just $12 a month. The days of paying huge cable bills for programming packages where you don't care about 95% of the channels are mercifully over.
Cable providers didn't like it, but they're holding up on the broadband end for their infrastructure wagers to pay off. Lesser cable channels didn't like it, but they moved on to ad-supported models through YouTube and Hulu or smaller licensing deals with streaming content providers.
Yes, Netflix isn't the only company providing unlimited streams at a reasonable price in 2014. CEO Reed Hastings had to step down from Microsoft's (Nasdaq: MSFT) board of directors in 2012 when even Mr. Softy got in on the fun. Gaming consoles get as much play for streaming celluloid and surfing the web as they do actual video games, but you didn't need a time machine to see that coming.
Netflix's biggest challengers in 2014 are Amazon.com (Nasdaq: AMZN), Microsoft, Facebook's Community Theater, and Comcast's now stand-alone Xfinity service. If you were expecting Blockbuster, Redbox, and the Cupertino cuties, you're out of luck.
The Blockbuster stores still standing are now entertainment-oriented consumer electronics stores. They even make house calls to square away any wireless home theater issues.
Coinstar's (Nasdaq: CSTR) back to relying on swapping pocket change for gift cards. It underestimated the quick demise of optical discs. Folks still occasionally watch Blu-ray, but there are only a third of the Redbox kiosks that there were at its peak in late 2011.
Apple (Nasdaq: AAPL) never got around to rolling out unlimited streaming services for video or music. It's strange, I know, especially since the Apple high-def TVs it introduced in 2013 were the big-ticket hit of the holiday season. It could be because this became a cookie-cutter field where it couldn't differentiate its offering with a premium brand.
Inside the Netflix model
Netflix now has a presence in more than a dozen countries in 2014. Every streaming deal is different, but the same can also be said for its flagship service closer to home.
Netflix still stocks discs, but studios finally caved in to a 2013 model where Netflix introduced tiered pricing. The conventional streaming plan sets viewers back $10 a month, but a $25 premium plan offers new releases from all of the major studios. Yes, all of them. There were a couple of initial holdouts, but they came around in early 2014. The $15 plan difference is largely divided between the studios based on the pro-rated content that is actually consumed by premium subscribers. Members on the basic $10 plan can also pay between $1 and $3 for a la carte premium content.
With essentially all content available digitally in 2014, Netflix has fewer regional distribution centers. It charges old-school subscribers who still crave discs an additional $5 a month for access to physical deliveries (one disc at a time, naturally).
Netflix now has more than 30 million global subscribers. It's the runaway leader, but its nearest rivals now have millions of couch potatoes apiece. Netflix's moat wasn't the content-licensing deals, since they became fairly standard from streaming service to streaming service. It wasn't even the recommendations engine, because Amazon and Microsoft were brainy enough to catch up quickly. No, Netflix's biggest moat has been its brand. Studios won't let rival services undercut Netflix on pricing -- even markdown-happy Wal-Mart -- so it's pretty standard across the board. The economies of scale make it the most profitable player in this niche, and studios do wacky things to keep Netflix members happy like offering a one-time streaming event before a buzz-hungry flick hits the high-def multiplex.
Netflix also made its website stickier. User movie reviews are no longer the full extent of its Web 2.0 gimmickry. Taking a page from the late 2012 rollout of Facebook Community Theater -- where friends could gather virtually around a simultaneous stream in an interactive environment -- the streaming process itself can be social if that's what the member wants. Viewing timeline notes left behind by friends midstream or arranging for a simultaneous stream across a wide variety of member devices, Netflix didn't simply rest on its laurels once the cable companies began buckling.
Despite all of the gee-whiz engagement, Netflix no longer carries the ridiculous earnings multiple it did in early 2011. The good news is that earnings have improved dramatically as streaming's high margins, surprisingly lower churn rates, and cheaper subscriber acquisition costs have come into play. The bad news is that Netflix didn't trounce the market the way it did during the three previous years. Multiples contracted as earnings improved, but there was also a lot of volatility on the way to beating the market by a modest margin through 2014.
If you don't like my visions, blame the time machine.
What do you think the Netflix model will look like come 2014? Share your thoughts in the comment box at the bottom of this queue.
