- Netflix's traditional cable TV providers are beginning to sour on the company in favor of rivals such as Hulu.
- This could mean that Netflix might have to pay considerably more for content, thus placing it's already pressured margins under even more pressure.
- Netflix stock has had a significant run this year and could become vulnerable to a correction.
Netflix (NASDAQ:NFLX) has undoubtedly emerged as the most successful video streaming company in the U.S. and the world. Netflix videos are so popular that they are estimated to account for more than one third of downstream Internet content in North America during peak hours, more than double what second-placed YouTube manages.
Source: Ars Technica
One of the reasons why Netflix has been able to consistently outperform powerful rivals such as Amazon Prime by Amazon (NASDAQ:AMZN) and Hulu is because of its much wider movie and TV content, as well as its unassailable leadership in original content. Netflix’s 24-hour content rating of 2.6 stands neck-to-neck with that by America’s leading broadcasters, ABC and NBC, and is expected to surpass them as early as 2016. In fact Netflix CEO Reed Hastings believes that all TV will be on the internet in 20 years.
But it’s beginning to look like Netflix will have to fight harder for its content, and in some cases risks not having certain types of content for months on end. Netflix is not only set to go through a rough patch of several months without original content, but it’s traditional cable TV content suppliers are beginning to sour to the company in favor of its rivals.
Netflix has only occasionally been in a situation where it ran out of content to stream. The last time the company found itself in a squeeze was back in 2011 when Starz Pay TV declined to renew its contract with Netflix to supply the company with original content. Back then Netflix subscribers were just beginning to get used to the idea of original content, so the only damage that Netflix suffered was that its shares sold off quite heavily.
This time round, Netflix might not be so lucky. The company’s five-year contract with Epix is set to soon expire, and the company will be forced to go through several months without any original content until its new contract with Walt Disney (NYSE:DIS) kicks in early 2016. I explained this in the article where I pointed out that the major risk that Netflix might face this time is that with no original content, subscribers might not be too eager to sign up, which is a bad thing for the company since the fourth quarter is usually its strongest in terms of new subscriber additions.
But a far bigger problem could be brewing for Netflix. There are growing indications that its traditional cable TV content providers are beginning to sour on it. Part of the reason why this is the case is because Netflix is largely to blame for the rampant cord-cutting going on in millions of American homes. Millions of subscribers have been ditching cable TV in favor of streaming video services such as Netflix. It’s only natural for these companies to weigh the monetary gains of licensing their content to video streaming services against the attendant loss of subscribers. You can deduce this much by some recent comments by 21st Century Fox CEO James Murdoch, who was recently quoted saying that the rules of how they sell content to providers have changed, and the company will be licensing more content to Hulu instead of Netflix because Hulu ‘‘offers better compensation.’’ Hulu, one of Netflix’s biggest rivals, is co-owned by 21st Century Fox, NBC Universal, and Walt Disney. Netflix is of course a much more formidable rival for these cable TV companies than Hulu, and it’s not hard to see why they are more willing to license content to Hulu rather than Netflix.
Cross-licensing streaming rights to two rival companies is of course a recipe for trouble. The biggest reason why Netflix declined to renew its Epix contract is because a clause in the contract allowed it to become non-exclusive just two years in. As a result, Epix licensed to Amazon Prime, Netflix’s biggest rival. Netflix was of course gutted and opted out of the deal as soon as the opportunity presented itself. You can bet that 21st Century Fox is looking to push Netflix out using the same bait and switch method.
HBO, one of Netflix’s streaming rivals, has already gone a step further. The company has struck a five-year exclusive deal with Sesame Workshop for the kids’ classic Sesame Street, meaning Netflix subscribers won’t be getting the popular program once its current deal with HBO expires towards the end of 2015. HBO recently outgunned Netflix when it bagged 14 Emmy awards to Netflix’s four, indicating the kind of competition that exists in the space.
The Bottom Line For Netflix Stock
While these developments are not likely to affect Netflix materially over the short-term, they point to a future where Netflix will have to fork over a lot more money for its content due to intense competition. High content costs means that Netflix will languish in the red longer, placing its share performance in jeopardy.
The effects of the end of the Epix deal, however, could take a hit on Netflix shares in early 2016. With the shares up 101% YTD, and given the extreme volatility of the stock, I believe that that time is ripe to take some profits here.