Netflix Runs Into the IT Crowd

April 11, 2014 Leave a comment

Netflix Runs Into the IT Crowd

MIRIAM GOTTFRIED

March 28, 2014 4:28 p.m. ET

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Competitive clouds are forming in Netflix‘s NFLX -1.46% crystal ball.

When it comes to Internet video streaming, Netflix has stood out as a leader, despite competition from Hulu, Amazon.com, AMZN -0.05% iTunes and YouTube. But reports this week of Apple AAPL -0.11% and Amazon plotting deeper moves into video suggest big technology companies are just getting started on their advance into its territory.

The market for video-streaming services could be a lot more crowded in the next five years or so. And that threatens the two big factors underpinning Netflix’s giddy valuation: the trajectory of its subscriber growth and its power to raise prices.

The bullish case for Netflix, whose stock trades at 76 times forward earnings estimates, rests on a straightforward idea. Namely, that it can continue to increase its U.S. subscriber base at a rapid rate and that, by the time that growth starts slowing, it will have established the competitive moat it needs to raise prices without losing customers.

Netflix estimates it can get 60 million to 90 million domestic subscribers, up from 33.4 million at the end of last year. That forecast looks ambitious already. The entrance of well-financed competitors could make it all the more difficult.

Netflix’s would-be Big Tech rivals have the advantage that selling video-streaming subscriptions isn’t their core business. Apple, which is in talks with ComcastCMCSA +0.94% to set up an Internet-based TV service, has revolutionized the music and wireless businesses even though its primary business is designing computing hardware.

Amazon, which The Wall Street Journal reports is considering an advertising-supported streaming-TV service, has so far used video as a selling point for its Prime subscription service. Free TV should have a broader target market, but selling goods via Amazon’s e-commerce platform would remain its core business. Thanks to an investor base far more focused on top-line growth than margins, Amazon also has the advantage of not needing to immediately make money in video.

Granted, there are many hurdles to each of these services taking off. Comcast is unlikely to cede control of its subscriber base to Apple. Amazon, meanwhile, would need to negotiate separate rights to show content on an ad-supported service and may not be allowed to use its best content for that.

It would also take a lot to supersede Netflix’s dominance. Its site is responsible for 32% of downstream traffic on fixed-line broadband networks, according to Sandvine. That is nearly 10 times greater than iTunes and nearly 20 times more than Amazon’s video service.

But Netflix’s rise has happened over a relatively short period. So it is a distinct possibility that a competitor could unseat it from the top spot or start a price war in coming years. Crucially, none of these Big Tech services has to become bigger than Netflix to stop it growing into its current valuation.

Netflix may be king of the video-streaming services, but its investors would be wise to watch the throne.

 

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Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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