Read this analyst note on SeekingAlpha yesterday:
Google's big overhaul of YouTube is the latest evidence that Netflix is facing a growing, formidable field of competitors. "Unlike other streaming video competitors, YouTube is on nearly every device platform on which NFLX is running today. We believe that it is this platform distribution in particular that gives GOOG a significant leg up," Wedge Partners writes.
It's occurred to me that what makes Netflix so hard for others to catch is their ubiquitous delivery platforms for streaming. But it is getting to be a very, very crowded market. (DISH buying up left-for-dead Blockbuster in large part for its streaming service.)
Later in the thread, another commenter said:
Netflix had great trouble defeating Blockbuster, a loser company by any means, prior to 2008. The next set of challengers will be Amazon, Apple, and Google, all armed with 10s of billions of cash and run by extremely competent management.
To which I replied:
dividend_growth, you make some good points about the competent management of would-be netflix-killers AMZN, AAPL and GOOG - though I don't think Google makes as much sense in that list. It's true that YouTube is more and more of a force to be reckoned with, but is Google aggressive enough to move away from its strictly free model?
Netflix may still be a buy even though it's already a very expensive company by valuation. Over $12B and there are more attractive companies to me out there, like UA or DECK say, still in the business of selling physical things - which are a better business than selling bits - which for now at least, would seem to be a very low-margin business.
Netflix had a killer model when the first sale doctrine was heavily in play, i.e. with physical discs. And that's still a very profitable business - as a direct result of the 1979 Betamax Case. But with digital it's all up for grabs, and the content producers have a great deal of power. Granted, at this point if we're talking film distribution, Netflix is pretty much it - apart from the theaters, and that's not a very exciting business unless we're talking IMAX. So the studios cannot just say bugger off to Netflix, not in today's market.
But their margins are going to be heavily under pressure. That's not to say the stock will necessarily decline - I am not going to say short Netflix by a long shot - but if the price continues to rise it will have to be with awareness of that encroaching margin pressure.
At this point I decided to write a longer article on this site about Netflix. I could have written about Google just as easily, but I'd still rather own Netflix, as expensive as it is with a market cap above $12B, than Google. Google's a great company, and not a bad stock to buy, but I just don't see the explosive growth you could still see from Netflix.
For instance, I was asking myself whether I could watch Top Gun on Netflix streaming. Of course I can get the disc delivered, but can I watch it on a whim? I knew in my heart the answer was no. Verified today:
Available in DVD and Blu-Ray. But not streaming. As I point out above, the physical disc model is a much more profitable model, and one that Netflix can offer at a lower price point by far than if they tried to reproduce their whole catalog in streaming.
However, it's also an issue of making deals with the studios - who have thus far been holding out for premium pricing. At some point, they will relent. Sure, Netflix will pay billions for these deals, but they won't make them if it will kill their margins entirely.
What we've seen with Coinstar / Redbox talking video streaming, Amazon always in the mix, and now a possibly-reenergized Dish/Blockbuster stepping into the ring, that everyone wants into streaming. But look at their results so far. Fact is, it is not easy making deals with the shyster movie execs.
They want blood money, and so far no one has had enough clout (read: pure numbers) to muscle them into a workable deal - the way Apple did with iTunes and the record companies and its fixed a la carte model. But my money is on Netflix to be the first at least to make that happen with the studios.