Why Netflix succeeded?
So far Netflix succeeded big. Main reason for Netflix to succeed is that it is a cost effective model to send DVD's by mail from one location than having multiple stores running all the time. Even if you have monthly subscription of $8.99, maximum one can rent per month is 4 or 5. Nobody could compete with this model because patents filed with this model restrict other companies going for the same model. Other competitive model is RedBox. So Blockbuster failed. I think Blockbusters pain is going to be Redbox's gain.
Now coming back to Streaming. Is it possible to have streaming for monthly subscription?
Answer would be NO. It would not be possible for multiple reasons.
First reason is that streaming deals are expensive and cost a lot, to get all the contents needed to succeed. They cost on a regular basis unlike DVD's.
Second reason is that streaming needs those cloud service rented from some tech companies or owned, which costs too compared to mail-DVD service.
Eventually, this is what is going to happen.
(a) In order to run streaming business, they would have to increase the subscription charges.
(b) Limit the number of views per subscription.
If they do (a), Netflix will start loosing some subscribers. This is going to increase the cost again and will be forced to do (b).
When they do (b), this is exactly what happens. Netflix will start limiting the number of views per month. Actually this is already happening, if you read Netflix's recent blog.
This is nothing but renting X amount of movies per month for 'Y' amount of money. But this model is nothing but Video on Demand presented in a different format, which other companies already doing it. It is like a regular wholesale seller. You can see Amazon doing 99c a movie, etc which is nothing but video on demand model. But not a wholesale and regular seller.
Will that work? It will work for only some people, not for all. This IP-VOD is not a new for just Netflix, there are already companies like Amazon, Apple TV, Google TV(Yet to come) are doing.
Eventually Netflix is also be forced to follow same VOD model. This creates huge competition in streaming business. In this model, Netflix has absolutely no competetive advantage like it did with DVD-rental by mail model.
Eventually, this will stagnate Netflix growth. This could happen in this quarter or next. Just wait to see Netflix's cost going up in this quarter.
In my opinion, Netflix has already peaked. Within soon, you will see correction in stock price.
They have only two options now to compensate the cost. (1) Dilute the stock, by additional offering or (2) reduced EPS.
You will expect one of these above two in this quarter or next, followed by change of subscription plan to limited streaming plan, then stock correction soon after that.
In keeping with my K.I.S.S. philosophy to investing, I think what are you saying here is that Netflix SUBSCRIBER BASE makes it potentially more than a bulk mail movie distributor. Same went for Amazon 10 years ago. Amazon was a well managed company and had the resources to build the physical and virtual logistics that have made it what it is today. Yet, AOL also had a subscriber base, and we all know how that ended.
Netflix clearly has the physical logistics to schlepp DVDs, but it needs the virtual logistics (internet plumbing). Frankly, I think it is too late to do an organic build the way Amazon did. Too many big companies already understand how the game is played and already have the infrastructure. Netflix needs plumbing right away. So far they have rented it, but that gets expensive and the stock's P/E demands EPS growth. The other two options are to either acquire an infrastructure company using stock or at least do a partnership. Both are possibilities, but I think big dogs like AMZN and GOOG want to do their own thing.
Do I think NFLX is overbought? yes. overvalued (given "present" conditions)? yes. Going forward, overvalued? I don't know.
BBI got killed by NFLX mainly because of fixed subscription pricing vs per movie/+late fees. "Late fees" was such a bad experience for most people, it evokes feelings of disgust (at themselves and at BBI).
Movies on demand have been available for a while on cable. I remember ordering a movie once. I don't remember doing it again (with the exception of PPV).
Subscription streaming is not the same as VOD/rent on demand streaming. This is why AAPL TV signed up with NFLX but I'm not sure they will ever support AMZN streaming. Itunes is a major/direct competitor of AMZN "media" service (includes sales/rent/VOD).
Many assumptions here is that current conditions will be stagnant. They cite the negative effects of this, and they are very convincing.
When the dotcom was happening, AMZN was considered by everyone as overvalued (even now, many consider it's overvalued). Everyone said as a book retailer, its valuations were way out of line compared to B&M retailers. They even cited that the internet industry sales/revenue for the year 2000 was a measly $1B, while many dotcom companies were valued at multiples of billions. Now it's 2010. AMZN is no longer just a book seller. It is the biggest online retailer in the world (some would disagree). The point is things are not stagnant. If you went by the whole internet sales in 2000 and projected forward the value of AMZN, could you have seen the revenue ttm for AMZN 2010 would be $28 billion? That's one company having 28 times the sales of the whole internet in 2000.
When celfons were new, they cost so much and none of these unlimited minutes. Then free long distance started on the celfons. Traditional phone companies were getting scared. Monthly costs on celfons started really coming down. We cut our landline service in 2006. Many people we know don't have landlines nowadays. When we did it, people were shocked to hear we don't have landline anymore. Now with VOIP, you can have internet number.
How many cable companies are out there? How many cable-subscribers? Recently read an article headline that some people are cutting their cable service because many shows are available on the internet. Will NFLX be a similar thorn to the cable companies, like the celfons were to the traditional phone companies?
Fixed low price of NFLX and unlimited streaming DOES NOT equal cable companies' big price and unlimited viewing. Not YET. Content availability is absolutely not even close. Today. Future? Remember celfon service pricing was cost prohibitive in the beginning.
NFLX just signed with NBC Universal. Day-after availability for many popular shows. How many more deals out there are gonna be signed up before we say that fixed low price of NFLX and unlimited streaming is almost equal to cable companies' big price and unlimited viewing? How about when same-day availability comes? How about when live broadcast (of course some buffering delay) becomes available? Media conglomerates are starting to embrace the future/internet and are now starting to sign deals with companies such as NFLX, Itunes, AMZN, etc.
There's enough room for many competitors. NFLX is distancing itself from the pay-per VOD/single movie or show model. NFLX is going after the cable companies' model. Things could change. NFLX strategy could change.
NFLX overvalued in the future? Who knows. I don't. Monthly service price of NFLX should increase as significantly more content are available which equals higher revenues...
yep been long since 33$. Working with house money and took some profit this past wednesday and friday. Still have plenty of free shares. I have never shorted any stock not to my liking.
I figured you were short and not a share owner, by the way you outlined your first post, leaning more negatively towards NFLX. GL with your efforts of shorting and calls.
Let me simplify things a bit. In the video rental business, you have three main metrics: price, selection and delivery (how long you have to wait). Pick any two. Blockbuster chose selection and delivery. Netflix chose price and selection. Redbox chose price and delivery. Those are the three models, and there will be room for all three as far as I can see. According to your analysis, streaming is a substitute for either Blockbuster (selection/delivery) or Redbox (price/delivery), but not Netflix. There will always be people who want a low price, a large selection of movies, and are willing to wait a few days to get them.
To me, the question is not whether Netflix will survive, because I'm sure it will. The problem is that with a 43x P/E, investors expect BIG TIME GROWTH. This company already has about 1/3 or the total US rental business. While nobody can say for sure what the final demand will be for the price/selection model, it would be hard to image that it will end up being much more than 50% of total rentals. So, in order to grow, Netflix needs to either (1) get into one of the other models via streaming video, where they have no competitive advantage and/or (2) Go international with their current mail delivery model. So far, they have not pursued option #2 at all, which makes me wonder if it is even logistically possible.
What you are saying is very true! With Netflix's streaming business, they can give only either price/delivery model or selection/delivery model. Not all at once. Right now, with their streaming, they are giving price/delivery, but without much of selection. Actually, they are trying to add selection, then eventually that will force them to loose price because of huge content cost. I am sure that they will be forced to follow VOD model which is selection/delivery model. But surely, stock is overvalued at this point when the transition is happening between price/delivery to selection/delivery as there are bunch of VOD companies already giving selection/delivery. Competition is only going to increase. :)
Just now went to YouTube to stream a movie and see what it's like...SUCKS! Horrible streaming, keeps pausing, even though we have high speed access, and our Netflix streaming rarely pauses. No comparison. Been a Netflix customer since 2004. Become a shareholder at $11.62, gained from the one and only split, and then sold at $140. The only reason I sold was to avoid a drastic fallback in price caused by over-bearish analysts who used to never miss an opportunity to bash it. Now all of a sudden every other analyst and their brother is pumping it hard. I can't complain for my gain, but man I wish I would have help on just a bit longer.
It very well may be running on speculation but does'nt every other equity's price is based on speculation and future growth's prospect.
GOOG, AMZ, Hulu and many more to come not to mention bit torents and nzbs all are the sources of content, but so far in reality NFLX is the one who was able to succesffuly turn solid revenue stream through its delivery mechanism. As far streaming or downloading playing field is still open to see anyone as leader.
P.S Intention is absolutely not to belittle your analysis, its just to add more perspective to it. No offense intended.
As an example, for the contents that others have, go to amazon's VOD section like the one below...
You will see that 53,320 movies are there for streaming on Amazon. Click on movies and on the content providers section click on See More...
You will see bunch of content providers...
It is not a hypothetical or speculation... Actually Netflix is running on speculation.
What do you mean?
Google and Amazon already has these content libraries.
You might be surprised to see Epix which signed a deal with Netflix, themselves have a streaming business which is in HD format.
Right now, I am watching a movie on you tube. :)
Dear Netflix lover,
Let me post some positives of the Netflix.
They have a very good DVD-Blu-Ray Mail rental service. One of the best model because it is cheapest way to get Discs with widest selection. Only thing you need to do is to plan ahead of time, what movie you want to watch. At the same time, you will be forced to watch bunch of movies every month to feel your subscription is justified. I am sure there are many people want to just want to do this for some time. They are subscribers! :) I am not one of them though... I want to watch when I feel like want to watch a movie. Don't want to be forced.
Redbox is also good, but selection lacks. But positives of Redbox is you can get a movie instantly, just you have to drive little bit. :) I believe blockbuster failed because of Redbox more than the Netflix because Redbox and Blockbuster have more comparable business than the Netflix.
Netflix streaming is not really positives of the Netflix in a long term. Sorry... It might look like positive for now because they are giving you unlimited streaming with only small percentage of streaming movies available. But if they have to compete with other VOD companies with full array of movies, TV shows, then they will have to add all the movies/shows for streaming. That needs sdeals with Studios. There are bigger companies out there would compete with Netflix in this area as Netflix does not have competitive advantage in this area. Bigger companies are sitting with big chunk of money. Eventually you are going to loose unlimited streaming some time soon. Don't know when, but that's going to happen for sure.
I am posting both positives and negatives of the Netflix. Please don't be offended.