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Netflix In A Formidable Position

Posted on Thursday, May 5th 2011

NPD Group’s latest VideoWatch Digital tracking report found that Netflix commanded a 61% market share of the movie/TV streaming and downloads market in the U.S.. Comcast ran a distant second with 8%, followed by DirecTV, Time Warner Cable and Apple each claiming a 4% share. According to the report, digital video now accounts for nearly 25% of all video volume at home. In the recently reported quarterly results, with 22.8 million U.S. subscribers, online streaming and DVD rental provider, Netflix, has become bigger than Comcast, the country’s largest cable TV provider.

Netflix’s Financials
For Q1, Netflix (NASDAQ:NFLX) saw revenues grow 46% over the year to $719 million compared with the market’s expectations of $703.6 million. EPS of $1.11 was also significantly ahead of the market’s target of $1.03. The company ended the quarter with 23.6 million subscribers, compared with 20 million last quarter.

For the current quarter, Netflix projects EPS of $0.93–$1.15 on revenues of $778 million–$798 million. The market was looking for earnings of $1.19 per share and revenues of $767.5 million. During the quarter, Netflix also expects to send out fewer DVDs in the mail and will have more users accessing content online.

Netflix’s Global Expansion
Last September, Netflix launched in Canada and today claims to have access to 8% of the country’s broadband population with more than 800,000 subscribers. It is planning to enter two new markets with one planned for the second half of this year and the second by early 2012. Netflix hasn’t disclosed details, but says it is already working on acquiring content rights for the new regions.

Netflix’s Content Costs
Netflix’s rising content costs remained a big concern among analysts. Wedbush analyst Michael Pachter estimates that Netflix will spend over $700 million this year and between $1.6 billion and $2.2 billion in 2012 on content costs, compared with $180 million last year. During the year, Netflix has already signed five big content deals and is in discussions with Miramax for a $100 million content deal.

During the year, the company’s new deals have gotten ot streaming rights to episodes of Lionsgate’s “Mad Men,” Twentieth Century Fox’s “Glee” and “Sons of Anarchy,” and CBS’s “Star Trek,” “Frasier,” and “Twin Peaks” at a cost of $325 million to $350 million annually. Adding streaming rights for Paramount Pictures’ 350 new movie titles in Canada is estimated to cost $10 million to $15 million a year. Additionally, Netflix has ventured into original streaming content through a new television series “House of Cards,”purchased from Media Rights Capital for $100 million for a two-year deal.

Netflix’s Competition
Besides Hulu and Amazon, competition is now coming from Facebook and Dish. Earlier last quarter, Facebook announced its plans to get into movies with the online rental and streaming launch of “The Dark Knight.” Facebook is also expected to be working with multiple WebTV platforms on apps for streaming content. International expansion will be easier for Facebook as it already has access to more than 600 million subscribers worldwide. However, content licensing and organization will take further effort.

Last month, Dish Network bought out Blockbuster for $320 million. Dish has more than 14 million subscribers and is the No. 2 satellite TV service provider in the country. It plans to keep 500 of Blockbuster’s 1,700 brick-and-mortar stores open and, according to Netflix, could begin a “substantial streaming effort” for the Blockbuster on Demand service, which had 1.2 million subscribers last October.

Netflix’s stock is trading at $229.19 with a market capitalization of $12.04 billion. It touched an all-time high of $254.98 earlier last month. The stock, however, is probably getting ready to take a beating as the profitability of the business changes significantly in the upcoming quarters. However, top-line growth will continue, and that may also continue to hold the stock price.

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