Don’t Believe the Hype… There is NO Netflix Killer

Published Tue, Mar 22nd, 2011   Wall Street Daily Research

The announcement sent Internet message boards and bloggers into a breathless frenzy.

News that Warner Bros. planned to make The Dark Knight available for streaming via its Facebook page (for a nominal fee of course) had people speculating that it could spell doom for one of the most explosive growth companies in America – movie rental giant, Netflix (Nasdaq: NFLX).

And investors feared the worst, too, with Netflix shares dropping by 6% on the news.

So could Facebook really squash Netflix?

The Distribution Dynamics Have Changed… But Who’s Really Taking Advantage?

Warner Bros. denies it, but Paul Verna, an analyst with research firm eMarketer, thinks the studio is using this as an “opportunity to chip away at Netflix.”

Keep in mind that Netflix has taken a lot of heat since launching its web streaming service in 2008. After all, by delivering movies over the Internet, it’s severely cutting into the film studios’ distribution revenue.

But the distribution game has changed exponentially. Thomas Gewecke, President of WB Digital Distribution notes that Facebook receives “hundreds of millions” of daily visitors. And he adds, “Making our films available through Facebook is a natural extension of our digital distribution efforts.”

But let’s keep this story in perspective here…

Netflix’s 20 Million Subscribers Aren’t Going Anywhere

Yes, Facebook gives businesses access to more than 600 million potential customers – a great marketing resource, for sure.

But companies should consider exactly how the average person uses the social networking site. They certainly aren’t spending two hours watching a movie on their computer. That’s what devices like Apple TV and the Roku box are for. And unless Facebook is looking to broadcast to TV sets, it’s unlikely the site will pose a serious threat to Netflix.

Remember, Netflix serves up more than 5,000 movie titles (and growing) right to your TV… in high definition.

Meanwhile, since launching in 2008, WB Digital Distribution has only released a small number of films. And its biggest titles – The Dark Knight and Inception – were hardly made for 17-inch computer monitors.

Sure, other studios may follow Warner Bros.’ lead. But they’ll all have to get over the same hurdle: Making a 48-hour rental for $3 seem more attractive than unlimited streaming for $7.99 per month.

It’s going to be tough. Especially when you consider that in January, Netflix reported that its streaming service helped its subscriber base surge by 63%. The company now boasts 20.1 million users. And in February, the company’s share price touched an all-time high of $247.55.

So much for its demise at the hands of movie studios and the big cable companies. Speaking of which…

Net Neutrality is No Netflix Killer, Either

Back in December, the FCC made its official ruling on the “Net Neutrality” issue.

(In case you’re not familiar with it, the Net Neutrality concept is this: Internet Service Providers – ISPs – like Comcast shouldn’t be allowed to enforce restrictions on different kinds of online content, sites, or platforms. This way, the Internet remains an open space for entrepreneurs and users alike to create content.)

The FCC’s decision? That ISPs – many of which are cable companies – can charge extra to transfer video content. But only if the amount charged is “reasonable.” (No surprise that there’s vagueness somewhere!)

Basically, that means content delivery networks like Limelight Networks (Nasdaq: LLNW) will continue to pay a stipend for beaming Netflix into your living room. And although some experts predicted these fees would help Comcast (Nasdaq: CMCSA) destroy Netflix, Netflix’s profits have continued to grow.

Then, on March 14, news broke that AT&T (NYSE: T) will impose a broadband usage cap. Going forward, DSL customers will be limited to 150 GB of data per month.

Again, the rumors started circulating – that this is the end of Netflix. And again, the rumors were off base. Why?

Because streaming Netflix titles – in high-definition, no less – uses less than 1 GB of data per hour… meaning that you could easily watch 75 movies every month without reaching that usage cap.

Don’t get me wrong… I’m not saying that Comcast and AT&T aren’t a threat to Netflix. They are. But realistically, there isn’t much they can do to take the company down.

Besides, Netflix is actually cable-friendly…

How Partnering with Netflix Could Help Cable

In 2008, Netflix partnered with premium channel, Starz. Today, it streams Starz movies and original programming to subscribers.

And according to Starz, the collaboration has resulted in its own subscriber base growing. The company’s DVD box-set sales are up. Meanwhile, HBO – which has turned down working with Netflix – has seen zero growth in its subscriber count.

Bottom line: Entertainment distribution is changing fast. But digital content is still very new, so it isn’t surprising that Netflix has made some enemies in just two years.

But at the same time, its customer base has also exploded by 113%. In the company’s own words, “Netflix is good for consumers, good for content producers and is one more competitor for existing aggregators.”

And whether they like it or not, Netflix is here to stay.

Good investing,

Alexander Moschina