JaysRage (94.06)

The death of Netflix

February 19, 2013 – Comments (1) | RELATED TICKERS: NFLX , AMZN , VZ

The death of Netflix as a stand-alone company is inevitable.   I don't even know exactly how it will happen, but I know it will happen.   

What does Netflix have going for it?

1) Huge subscriber base with room to grow internationally

2) Top-tier exclusive content (Disney!)

3) First-mover integration into streaming media hardware firmware

4) Best-in-class direct-mail DVD distribution

After laying all of that out, I can see why it seems attractive.   That is a lot of positives.   Let me throw some cold water on all of those positives, however....

1) The subscriber base is extremely price sensitive, making price increases impossible in the near term, meaning that the only means of revenue growth is adding subscriptions.   In addition, increasingly higher amounts of subscriptions are streaming subscriptions, which are significantly lower margin than DVD subscriptions, which are falling.   There is reason to believe that this will continue.   

2) Content is getting more and more expensive, and the competition for the content is driving up prices.   Netflix has gotten into the business of creating their own content, but they are a late-mover in this space, they don't have a huge cash pile, so there is no real reason to believe that they can consistently be a developer of high-quality content.   This makes them a broker of content.....a middle man.   History has not been kind to the middle man.   The consumer eventually finds the source.   Content providers are already attempting to find ways to distribute their own streaming content and competitors are driving up the price to lock in quality content.   

3) Competitors are already being integrated quickly into streamer hardware.   Amazon Prime and Hulu and others are becoming more available, not to mention Apple.     

4) Physical DVDs are becoming obsolete.   Netflix's DVD business will continue to erode until it is a fraction of its current size.    

The leverage in the content business happens at creation or at end-delivery.  If you control the content....or if you control the distribution channel (internet provider....or hardware), you can put pressure on the middle of the delivery network.  Netflix does neither.  They could be attractive to a major player on either side via buyout, but Netflix as a stand-alone company really brings nothing to the table and they are completely dependent on someone else to give them content and to let them distribute it.  They are trapped in the middle and will eventually be squeezed out of the picture.