Is Netflix About to be a Has-Been? Suddenly, Problems Seem Overwhelming

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Netflix ( NFLX ) viewership for certain television shows is rising at a time when ratings for the cable TV stations that gave birth to those programs are falling. Ironically, this is not news Netflix investors should celebrate. This sort of success is a serious threat to Netflix's livelihood.

As YCharts has discussed here before, Netflix lives in an awkward world where competitors control access to its products. Cable television companies - companies that, like Netflix, charge viewers monthly fees to watch shows -- sell Netflix streaming rights of older episodes of their popular shows. Content creators like The Walt Disney Co. ( DIS ) and Viacom ( VIA ) do so in large part because they expect Netflix to create fans that will tune into their cable TV channels for the current episodes. Such agreements have helped Netflix, a $4.5 billion market cap company, to continue building revenues as it drops DVD subscribers in favor of streaming more content.

NFLX Revenues TTM data by YCharts

But when Netflix subscribers choose to stream those shows instead of watching the first-run versions on cable, Netflix becomes a direct threat to the content-makers. In a report published last week, Bernstein Research analyst Todd Juenger used TiVo data to confirm that such a trade-off is indeed happening, at least with children's programs. Ratings for Disney kids channels and Viacom's Nickelodeon dropped in households that streamed Netflix. He predicted both companies will yank their kids' programming from Netflix.

Juenger's clever analysis may be the tip of the iceberg, and it's hard to underestimate the potential fallout. Nickelodeon and Disney decisions to deny Netflix SpongeBob SquarePants, Phineas and Ferb and whatever popular kids shows they roll out in the future would create more gaping hole in Netflix's only product, its content library. That same library already lacks depth because HBO, maker of the most popular television shows on the planet, refuses to sell anything to Netflix. Comcast, a huge cable company with its own popular sports programming, also has no intention of teaming up with Netflix. Thinning out the kids' lineup would surely make selling Netflix subscriptions, or even keeping current subscribers, a lot harder.

Investors were worried about Netflix's ability to ramp up subscriber numbers even before Juenger's bombshell. They pushed down the share price some 14% after its first quarter earnings report, released pre-Juenger last week, even though earnings (losses, in this case) and revenues were better than forecasts. Current quarter U.S. subscriber growth, it turns out, will be a lot lower than they'd hoped.

NFLX data by YCharts

Meanwhile, competition for Netflix is heating up at every turn. Hulu, HBO, Amazon.com ( AMZN ), Comcast ( CMCSA ), Apple ( AAPL ), Google ( GOOG ) and several start-ups are building up competing services. These companies compete for content as well as subscribers; they'll bid against Netflix for exclusive rights to television and movies.

So creating and maintaining a content library is about to get more expensive, at a time when Netflix is already spending heavily. Technology costs were the biggest factor in Netflix's latest operating loss. Higher licensing fees also played a substantial role. Together, they turned Netflix's year-ago quarterly operating profit of $102.2 million into a $1.93 million loss. Free cash flow and profit margins plunged.

NFLX Free Cash Flow TTM data by YCharts

Netflix's big subscriber base should continue to make it an attractive partner for certain types of shows. Along with the kids' show warnings, Juenger's report pointed out that reruns of Mad Men and other serialized dramas on Netflix really did send viewers back to cable for the new season. Netflix also has and will produce some original content, although its track record with this has been mixed so far.

But Netflix will never again be the Holy Grail of content, the place where viewers can find whatever they desire, no matter how popular or obscure. That's the model that made the old DVD-based Netflix famously successful, and that share price line take such a leap in the years up to 2011. The new Netflix will have to find another way to stand out in a crowd, without hurting the competition too much in the process.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts , stock ratings and portfolio strategies .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: investing , Stocks

Referenced Stocks: AAPL , AMZN , CMCSA , DIS , GOOG

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