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Netflix, Inc. Message Board

  • ktsadik ktsadik Nov 30, 2010 4:41 PM Flag

    Now Short 100,000 shares -- my thesis

    I manage a $600mm fund so this comprises a 3.5% position. A very manageable sized position which gives me the staying power to ride out market dislocations, a situation I view is currently in progress.

    Netflix has a tremendous business model and the first mover advantage in the subscription online-delivery space. If NFLX's supremacy in this arena were to be uncontested, I would be wary of a short position. However, it has been widely publicized that AMZN and Redbox (likely through WMT's Vudu) will be making waves sooner than later. Hulu is a sleeper depending on its owners' commitment (GE, News Corp, Disney) to winning in the space. AAPL and GOOG are two other players that could be serious contenders but currently seem dedicated to the ala carte model. With this impending flux of competition from well-capitalized players (unlike Blockbuster even in '06), NFLX will witness a deterioration in its financial metrics as detailed below:

    Subscriber growth - NFLX's current impressive growth is up against several factors -- the law of large numbers and increasing competition from several angles. With nearly 20mm subscribers, NFLX will find it harder to grow at prior rates given the addressable market of 125mm US and Canadian TV households combined. The management team is looking to expand outside North America to maintain its subscriber growth trajectory but I believe it will be difficult to do so given the need to negotiate oversea digital movie rights while battling the entrenched competition. Moreover, as more domestic viewing options -- regardless of price -- become available to the consumer, the smaller the pie for NFLX to feed upon.

    ARPU - As more players offer a subscription based model, the more likely there will be pricing pressure. Hulu foolishly priced its product at $9.99 which fared poorly against NFLX's prior $8.99 price point. Hulu tested various lower price points in an effort to drive demand and settled at $7.99 -- well above the previously reported $4.95 trials. This move allowed NFLX to immediately price its streaming only offering at the same price and increase its pricing on DVD delivery. This move may temporarily stem the decline in ARPU but in the longer-term, subs will trade down to lower priced DVD plans or move to streaming only and fulfill their desire for new releases through other alternatives (i.e. Redbox). In my discussion with CSTR's mgmt team, they expect a nice boost in business from these defections. More concerning to NFLX, will be how Hulu ultimately prices its service. If the new price point does not drive demand to its satisfaction, Hulu may lower its price again, putting add'l pressure on NFLX to react in kind. In 2011, Redbox will launch its digital subscription service (in partnership with WMT/Vudu probably) and will likely price it below the current offerings. In short, expect pricing power to erode in the next 6-18 months.

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