Netflix has enjoyed extraordinary success over the past year, having increased its subscriber base by 63% to 20.01 million in 2010, from 9.39 million in 2009. It delivered stunning fourth quarter results by beating consensus estimates by 16 cents a share.
Yet, Netflix faces serious challenges from Internet service providers (ISPs) over its traffic volume - one study by networking company Sandvine put its portion of evening Internet usage at 20% -- and from wary content providers who may want a bigger share of the company's profits.
In a maneuver apparently aimed at addressing potential content issues, Netflix is said to be in the midst of consummating a deal for a TV series.
According to a report yesterday (Wednesday) in Deadline Hollywood, Netflix has outbid other major cable networks for the rights to Media Rights Capital's drama seriesHouse of Cards starring Kevin Spacey. The 26-episode, two-year commitment could cost Netflix as much as $100 million, though negotiations are not yet complete.
This striking move raises speculation that Netflix may be planning to acquire an assortment of exclusive content that it could use, much as HBO does, to lure and retain subscribers.
Of course, having its own shows could also be a defensive move as Netflix renegotiates deals with the movie studios and TV networks that supply most of the content it currently offers.
For now, streaming others' content is the company's primary modus operandi. Netflix absolutely rules movie streaming over the Internet. No competitor comes close to matching its low $8 per month fee for all-you-can-stream content. Most charge anywhere from 99 cents to $9.99 to watch a TV show or movie.
NPD Group released a study Tuesday showing Netflix with 61% of movies downloaded or streamed in the first two months of the year. Comcast was a distant second with 8%, and the rest of the field - DirecTV (Nasdaq: DTV), Time Warner Cable Inc. (NYSE: TWC) and Apple Inc.'s (Nasdaq: AAPL) iTunes - tied at 4%.
That dominance, combined with its rapidly growing subscriber base, explains the excitement over the stock - it's up more than 200% in the past year. But to maintain the sort of subscriber growth needed to support its somewhat lofty stock price (it closed at $215 a share yesterday, with a Price/Earnings ratio of 75.59), Netflix knows it needs to pursue some bold strategies.
It's already reached over the border to Canada, launching its service there last year. Netflix plans to launch in another country this year, probably the United Kingdom. If all goes well, the company says, "we will continue to expand and invest aggressively in 2012 around the globe."
Stock analysis company Trefis, in a Monday report, said the stock price of Netflix will depend very heavily on how well this strategy succeeds, though it expressed "doubts" based on the smaller size of streaming markets like Canada and the less robust network capacity in larger nations such as China and India.
However, if Pacific Crest Securities analyst Andy Hargreaves is right, Netflix may have an answer for that.
"We believe that, on top of its existing momentum, the company is working with Facebook to launch deeper integration of Netflix into the Facebook platform," Hargreaves wrote in a report last week. "The first stages of these efforts are likely to launch within the next few months, and we believe they could drive incremental subscriber growth domestically while helping to accelerate Netflix's international expansion."
Assuming Netflix can keep its subscriber base growing, the biggest threat to its profitability would come from ISPs such as Comcast, which want Netflix to pay more because of the high volume of data it transmits into their networks.
In a December decision, the Federal Communications Commission (FCC) essentially sided with Netflix over the issue of "net neutrality," but the decision was ambiguous enough to leave Netflix concerned the ISPs may find a loophole.
Comcast also has a limit, albeit a very high one, on how much a customer can download, which is legal under FCC rules. AT&T (NYSE: T) has announced it will impose a similar rule on its customers starting May 1.
Netflix worries that such limits may affect its own customers, as streaming uses large amounts of bandwidth.
News and Related Story Links:
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FCC's Net Neutrality Plan Disappoints Comcast Corp. (Nasdaq: CMCSA), Netflix Inc. (Nasdaq: NFLX)
Net Neutrality Tested by Comcast-Level 3 Netflix Dispute
Los Angeles Times:
Netflix controls 61% of movie streaming; stock jumps on upgrade
As telecom industry evolves, success of Netflix is its biggest threat
Netflix To Enter Original Programming With Mega Deal For David Fincher-Kevin Spacey Series 'House Of Cards'
Letter to Shareholders
The Raw Story:
Telecoms want ‘to put Netflix out of business entirely,' Sen. Franken tells SXSW
Are Netflix's International Ambitions Justified and Achievable?
Report says Netflix working with Facebook on integration that could push international play