Netflix, Inc. (NFLX)’s Earnings Report Could Be Worse Than Investors Think

Page 2 of 2

Yet, there’s actually a much more prevalent form of cord-cutting going on. But it’s not one that’s favorable to Netflix’s business.

The Wall Street Journal reported in May that Americans are cancelling their Internet more often than they’re ditching cable. These consumers are likely turning to their smartphone’s data network.

And while Sprint Nextel Corporation (NYSE:S) still offers unlimited data, the majority of consumers have AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) — and they don’t. A limited AT&T Inc. (NYSE:T) or Verizon Communications Inc. (NYSE:VZ) wireless data plan is not suitable to supporting a Netflix subscription.

Netflix’s growing competition

At the same time, Netflix, Inc. (NASDAQ:NFLX) could be pressured by rising content costs. Amazon.com, Inc. (NASDAQ:AMZN) has moved into original programming as well, and competition from the Internet retailer could force Netflix to pay more.

Perhaps Amazon’s bid was the reason Netflix was unable to reach a deal with Viacom, Inc. (NASDAQ:VIAB). Netflix lost a great deal of children’s programming this quarter when it did not renew its deal with Viacom, Inc. (NASDAQ:VIAB); instead, Amazon.com, Inc. (NASDAQ:AMZN) reached an exclusive deal for that content on its Prime streaming service.

Netflix, Inc. (NASDAQ:NFLX)’s CEO Reed Hastings has trashed Amazon Prime Instant Video in the past, calling it a “confusing mess” in an interview with The Wall Street Journal. He argued that Netflix as a company was built to offer a better service, as it had no retail operation to get distracted with.

Yet, that retail operation could be an advantage to Amazon.com, Inc. (NASDAQ:AMZN) Prime Video. Along with video, Prime subscribers get free two-day shipping. Amazon could decide to ramp up content costs on Prime Video as a way to get more retail goods customers, using the service as a loss-leader. Netflix doesn’t have that option.

At the same time, there have been reports that HBO is mulling an alternative subscription model, allowing non-cable subscribers to get access to its web-based content. Already, HBO Go is offered separately in Scandinavia; were Time Warner Inc. (NYSE:TWX) to bring the option to the US, it would instantly become Netflix, Inc. (NASDAQ:NFLX)’s most formidable threat.

Investing in Netflix

Right now, Netflix appears to be valued on the basis of the company’s guidance; that is to say, Netflix can double or triple its number of US subscribers.

But if it can’t, it will run into some significant issues. Based on its content obligations, it could be forced to raise prices or issue new shares — both would be bad for investors.

Ultimately, Netflix, Inc. (NASDAQ:NFLX) shareholders need to keep a close eye on its number of US subscribers — that number alone could determine the company’s success.

Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX).

The article Netflix’s Earnings Report Could Be Worse Than Investors Think originally appeared on Fool.com.

Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Page 2 of 2