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Netflix’s Time Has Come

Posted on Friday, Aug 27th 2010

The television landscape is changing rapidly, with players such as Netflix (NASDAQ:NFLX), entering into deals aimed to attract more viewers by increasing streaming content library and thus posing stiff competition for cable giants such as Comcast. Earlier, Netflix signed a billion-dollar deal with Epix for exclusive digital rights to stream Lionsgate, MGM, and Paramount content. It also recently announced exclusive rights to stream part of Relativity Media’s movie catalogue, which includes titles such as Nicolas Cage’s Season of the Witch. These deals are win–win situations for both parties. Epix for instance, currently has nearly 3 million–4 million subscribers. Through the deal, Epix will reach Netflix’s 15 million subscribers. Meanwhile, Netflix can now boast of a library of over 24,000 streaming titles and 100,000 DVD titles. Clearly, if there’s a company whose time has come, it would be Netflix. Reed Hastings had a vision of online film distribution a long, long time back. The market and the infrastructure wasn’t ready. Well, now it is.

For the third consecutive quarter, Netflix added over a million subscribers to cross 15 million total subscribers. Over the year, the company recorded impressive 42% growth in its subscriber base, translating to 27% growth in revenues. However, Q2 revenues of $520 million fell marginally short of the market’s projected $524 million target. EPS of $0.80 grew 34% over the year and managed to surpass the Street’s target of $0.70.

Among other statistics, average revenue per customer fell 8% over the year driven by customers migrating to the lower-priced streaming option. Also, the company’s subscriber acquisition costs rose 13% sequentially and 2% over the year, suggesting tougher times ahead. The number of streaming customers continued to grow; 61% of the subscriber base streamed at least fifteen minutes of video during the quarter compared with 37% a year ago. Besides developing content, Netflix has also gained advantage over the competition by tying up with consumer electronics manufacturers. Earlier, the company had launched a streaming application for the iPad which it recently upgraded to support both the iPhone and the iPod. Their iPad application lets subsribers browse, access and queue content had been reviewed as a “killer application.” While the management hasn’t disclosed details, reports estimate nearly 200,000 downloads of the application by early April.

Netflix is planning to expand its content by adding a TV show library to compete with Hulu, which is a big streaming player primarily for TV shows. Meanwhile, Netflix’s other major competitor, Blockbuster, is going out of business. Unlike Netflix, which has to complete a 28-day waiting period before releasing DVDs for rent, and, as part of the new deal, a 90-day waiting period for streaming content release, Blockbuster had managed to sign deals with Twentieth Century Fox, Warner, and Sony to rent DVDs the day they are released.

Netflix is also evaluating entering the international streaming market and recently announced plans to enter Canada as a test market. The company will form its international growth plan depending on the success of its model in Canada.

Netflix predicts it will have 16.3 million–16.7 million subscribers by the end of the current quarter generating revenues of $546 million–$554 million and EPS of $0.61–$0.64. For the year, the company now expects 18.5 million subscribers, revenues of $2.14 billion–$2.16 billion, and EPS of $2.58–$2.86.

Netflix’s stock is trading at $124.25 with a market capitalization of $6.5 billion. It touched a record high of $140.90 earlier this month. Even at this current valuation, Apple should be evaluating the possibility of acquiring Netflix for the synergies that the company has to offer.

And meanwhile, Google is also gearing up to take further advantage of the online movie / video trend. Today’s news includes YouTube’s new movie section with 400 full feature-length movies. Are they going to compete with Netflix eventually?

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