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Netflix Faces Formidable Amazon

Posted on Thursday, Apr 21st 2016

Video streaming service provider Netflix (Nasdaq: NFLX) continues to be failing at adding subscribers at the rate that the market will like it to. Not only has international expansion failed to meet market expectations, but the domestic market is also facing severe headwind as Amazon continues to play a bigger role in the streaming market.

Netflix’s Financials

Q1 revenues grew 25% over the year to $1.958 billion, falling marginally short of the Street’s forecast of $1.966 billion. EPS of $0.06 was better than the market’s projections of $0.04 for the quarter.

During the quarter, Netflix added 2.23 million net streaming domestic members and 4.51 million international subscribers to end with a total streaming member base of 81.5 million.

For the current quarter, Netflix forecast total streaming revenues of $1.964 billion with an operating profit margin of 16.4%. It expects domestic streaming revenues at $1.2 billion and international streaming revenues at $754 million. The market was looking for domestic revenues of $1.228 billion and international streaming revenues of $744 million. Netflix expects to grow its domestic user base by half a million domestic and international user base by 2 million. The addition is significantly short of the market’s forecast of an addition of 586,000 domestic subscribers and 3.52 million international subscribers in the quarter.

Despite the release of Netflix in 130 countries earlier this year, Netflix’s international base is not growing as strongly as the market would like. Netflix may have released its service globally, but it hasn’t really developed content and pricing targeted at local viewing. The service continues to be targeted at affluent consumers who can afford to pay the $10 a month price tag and have access to international credit cards and smartphones.

Netflix’s Rising Competition

Netflix continues to face increased pressure from domestic players in the market. Amazon is gearing up to be its biggest rival. Earlier this week, Amazon announced plans to release a standalone monthly service available to viewers only for video streaming. Prior to the launch, Amazon users had to be prime members which cost them $99 a year and which included additional benefits such as free two-day shipping and full access to digital content including music, movies, and TV offerings. With the new plan, subscribers can now opt for $8.99 a month fee for access to the video service and $10.99 a month for all of Prime’s services. The move is targeted at Netflix’s video streaming customers who pay $9.99 a month for streaming.

Amazon is also offering some high profile content to its viewers. Its video streaming service offers programs such as PBS’ Downton Abbey, HBO’s The Sopranos along with several children’s shows from the Nickelodeon TV network. At the Sundance Film Festival in January this year, Amazon was a big buyer of independent films. It announced plans to release Woody Allen’s film Cafe Society at the Cannes Film Festival next month.

Netflix is planning a counter move of its own. During the call recently, Netflix announced that it would be open to the idea of permitting offline viewing of some content. Till recently, Netflix has been opposed to allowing subscribers to view content offline. Last year, Amazon allowed Prime customers in the US, UK, Germany, and Austria to download movies and TV shows and view them offline. The offering has been well liked by Amazon’s viewers and is now possibly going to be duplicated by Netflix.

Netflix also continues to improve its content. During the last quarter, it released several TV series including the successful Making a Murderer, Fuller House, a new season for House of Cards and Daredevil along with a collection of new films, documentaries, and children’s shows. For the current quarter, it has already lined up the launch of new seasons of original series like Unbreakable Kimmy Schmidt, Bloodline, and Orange is the New Black and debut original films like The Do­Over, Special Correspondents, The Fundamentals of Caring, and Brahman Naman. It is also releasing a new talk show with Chelsea Handler.

Netflix may be making all the right moves, but its disappointing subscriber growth has the market worried. Its stock is trading at $96.77 with a market capitalization of $41.43 billion. It touched a 52-week high of $133.27 in December this year and a 52-week low of $78.89 in May last year.

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