Reportedly, the U.S. Court of Appeals for the District of
Columbia Circuit ruled that
Netflix Inc.
(
NFLX
) had received unfair advantage and favors from the U.S. Postal
Service. The Postal Office is alleged to have discriminated
between Netflix and other mail-order companies by prioritizing
Netflix's DVDs.
GameFly Inc., a video game rent-by-mail service, had filed the
case against the Postal Regulatory Commission and demanded that
the mailed games should be equally treated. Netflix is currently
the largest DVD-delivery customer but that not might come of any
help to Netflix, as the ruling may change postal authority's
handling of Netflix's DVDs.
We believe that the current ruling by the court does not
materially impact Netflix, as it has shifted its business focus
from DVD mail to online streaming. Netflix's management has made
it clear that its future growth strategy is entirely dependent on
the online streaming business. Lower demand and increasing
postage and sorting infrastructure costs and the increasing
demand for the video-on-demand market prompted management to
shift focus to the digital medium.
Additionally, Netflix's movie rental service has been
witnessing slowdown for the past several quarters. In the last
quarter, the company recorded 6.8% sequential decline in total
subscribers, while revenue from the same declined by 6.9%
sequentially. Going forward, the company expects further decline
in the segment's revenue.
Moreover, when compared to some of its cable and
communications peers who have diversified revenue and cash flow
streams, Netflix relies solely on streaming for future growth, as
its DVD rental business continues to lose subscribers. We believe
that the streaming market is becoming overcrowded and this will
hurt Netflix's margins going forward.
Nonetheless, we believe that Netflix's diversified streaming
portfolio will not only strengthen its position in the
video-on-demand market, but will also be incrementally beneficial
for the company in attracting new subscribers as well as
retaining the old ones.
We believe that improved content makes its streaming services
distinguishable from other service providers such as HBO,
Amazon.com Inc.
(
AMZN
), Hulu as well as the newly-launched services from cable and
media companies such as
Comcast Corp.
(
CMCSA
),
Dish Network Corp.
(
DISH
) and
Verizon Communications
(
VZ
).
Currently Netflix has a Zacks Rank #3 (Hold).
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