Back in the summer of 2011 Netflix, Inc. (NASDAQ:NFLX) was king, and the stock was trading above a peak of $300. But in July Netflix announced they were going to unbundle their streaming and DVD rental service charging and would charge more to rent DVD’s. Customers responded by dropping the service in droves with over 800,000 customers unsubscribing. The story of the downfall of Netflix continued as they tried to separate the DVD and streaming by creating Quickster, the DVD rental service. Howeve, that couldn't last much longer than a week and the public lost faith. Netflix went from a $300 stock to a $50 stock in just over a year. With increasing competition, will Netflix be able to climb back up to $300?
Reasons to be Bearish on Netflix, Inc. (NASDAQ:NFLX) -Streaming subscriptions will not be as profitable as DVD rentals. At its peak in 2004 DVD profit per sub was at $26, while streaming was only $10 per month. -Price raises have proved to be elastic, as evident by the 800,000 customers they lost in 2011. -EPS growth in the past three years has declined 11%. -Cash flow has decreased for every quarter of 2012. -Netflix’s control over the DVD rental market has declined over the past few years. -Content providers have been increasing the cost for Netflix to have exclusive rights to their shows and movies.
-More companies are starting to compete for content rights.
The Competition -Amazon.com, Inc. (NASDAQ:AMZN) has been one of the biggest competitors to Netflix. Amazon's membership service “Amazon Prime” offers their members access to watch movies and shows online, similar to Netflix's service. They have been rapidly adding content since they introduced the service in February of 2011, and Amazon has reached agreements with providers like NBC Universal and CBS. Amazon Prime, however, is not just a streaming service; they provide better shipping deals and special offers, and it only cost $79 dollars a year.
-Hulu, arguably the biggest competitor of Netflix, Inc. (NASDAQ:NFLX), is a joint venture by NBC Universal, Fox, Disney-ABC Television Group, and Providence Equity Partners. Hulu offers free on-demand streaming videos, as well as subscription-based premium content. Hulu has content deals with NBC Universal, ABC, Lionsgate ABC, Sony, and Time Warner, among others. Hulu is a cheaper option to Netflix that only costs $7.99 a month. The company has gained approximately 1.5 million Hulu plus subscribers in its only 2 years of existence.
-Redbox, the DVD, Blu-ray, and video game renting kiosk, is not currently in competition in the streaming business but has started to dominate the DVD rental market. A subsidiary of Coinstar, Inc. (NASDAQ:CSTR) , Redbox made up 44% of the DVD rental market as of 2012, increasing from 27% in 2010; meanwhile Netflix has decreased from 34% in 2010 to 27% in 2012. Redbox announced in July 2012 that they were testing for their new service Redbox Instant, an online streaming service for which they've already have made deals with Lionsgate, NBC Universal, Paramount Pictures, and others.