Time Warner's ( TWX ) recent announcement of offering movies via Facebook has caught the attention of the media and Internet community as well as investors. There is speculation about how this could shift the balance of the media distribution business. Netflix ( NFLX ), which has established a strong foothold in online streaming business, should not overlook the threat that Facebook can pose in a longer term. Currently, the arena of online movie sales and rental is dominated by services like Apple's ( AAPL ) iTunes, Netflix, Amazon ( AMZN ), Hulu etc.
Our price estimate for Netflix stands at $119 , which is significantly below the market price of $218.
Netflix's Streaming Growth
Netflix originally started as a DVD rental business and moved to a hybrid business model in recent years after establishing a strong brand in the U.S. The company successfully built a DVD delivery business before moving in streaming, which resulted in accelerated growth of its subscriber base.
With more than 20,000 titles available for streaming and signing several deals with Starz, Epix, Disney and Relativity Media, more than 33% of new subscribers are signing up for Netflix's streaming-only plans, and total estimated streaming minutes have exceeded DVD minutes, according to the company.
Streaming content over the web is clearly a growing opportunity that Netflix is lapping up…but a growing business attracts competition.
Amazon and Facebook Look to Crash Netflix's Party
While the latest to join the bandwagon is Facebook, other competitors that are looking to expand include Amazon. This could potentially disrupt Netflix's accelerated user base growth, which is the key metric for sustaining Netflix's growth and frothy valuation.
Amazon - Amazon recently completed its acquisition of Lovefilm in Europe and has also started offering free movie streaming under its Amazon Prime membership (which allows its members to enjoy free 2-day shipping on most products sold) that competes directly with Netflix.
With this move, Amazon appears to have jumped into the European market ahead of Netflix. We think Netflix will probably enter the U.K. market later this year or early next year. Amazon is also pushing into streaming service in the U.S., and though its streaming content is less than that of Netflix, Amazon could potentially offer more content for a lower price in the future. On another note, Amazon Prime is just promoting its merchandise, and giving its customers an added advantage to enjoy free movies. All it needs is to beef up its content, and then it may be up able to put a real fight with Netflix.
Facebook - Now Time Warner is looking to experiment via its Facebook app. Though we believe this will not impact Netflix meaningfully in the near future, this development could open up new distribution channels and weaken Netflix in the long term. Facebook is already one of the most used video sites in the U.S., and with a global user base exceeding 500 million, it could easily become an effective medium for movie distribution.
Finally, movie studios are looking to compensate for DVD sales decline and that's not easy to come by given that movie rental or video-on-demand only let the studios make as much as 20% to 30% of what they can get on DVD sales. Given this fact, it is only natural for them to increase the number of rentals and video-on-demand views. This is likely to be achieved by making sure its content is distributed across as many platforms as possible and reaching as many consumers as possible. This will also give them advantage in terms of better negotiating the pricing of their content.
Falling Stock Price an Indicator?
Netflix's stock price fell about 20% from its peak of about $247 before recovering to around $215. It seems that investors are now getting more cautious regarding competition and Netflix's outlook. The news that Facebook was experimenting with movie rentals led to a quick 5% drop in market value. Could this be a sign that Netflix's stock is topping out in the near term?