Although Netflix Inc. (NASDAQ:NFLX) is currently synonymous with online streaming, tectonic shifts below the communications landscape pose a threat to the company’s dominance. Studios and cable companies were slow to understand that paying for cable TV is a thing of the past, and embracing the internet is the way of the future.
Over the last year, rivals began to close the gap Netflix built with its flat-rate streaming service. Hulu LLC is making bold strides to capture market share, going so far as to poach licensing rights from right under Netflix’s nose.
Meanwhile, cable companies like 21st Century Fox (NASDAQ:FOX) are realizing they’ve underappreciated the value of the streaming rights. The internet was previously seen as a place where content went to die, but the truth is millennials are taking their business online.
The coveted 18 to 49 demographic will increasingly skew towards digital modes of consumption and any company that ignores that reality will wither away in the barren wastelands of cable TV.
James Murdoch Says FOX is “Evolving”
The CEO of 21st Century Fox is James Murdoch, son and right hand to Rupert Murdoch, the founder of News Corporation (NASDAQ:TWSA). Murdoch Jr. spoke at Goldman Sachs’ conference a few days ago, laying out a vision for the company’s future. (Source: Deadline Hollywood, September 16, 2015.)
Murdoch indicated a subtle shift away from Netflix as the streaming environment broadens. This is less surprising when you consider that FOX co-owns Hulu with NBCUniversal, and The Walt Disney Company (NYSE:DIS).
Netflix overplayed its hand when negotiating the rights to Empire, FOX’s hit TV drama. The company insisted on a reduced price for the show because FOX had stacked the whole first season in their on-demand section. Netflix argued that making the entire season available undermined the contract’s value. (Source: The Wall Street Journal, June 16, 2015.)
That kind of power play may have worked a year or two ago, but times are changing. Netflix can’t protect its market share if it continues to strong arm content providers. This is their game to lose.
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As the deal for Empire turned sour, Hulu stepped in and picked up the contract. The company paid full price without kicking up a fuss over the pre-released episodes.
Hulu is making a bold push for both original shows and established franchises. It bought the rights to Seinfeld for $700,000 per episode. The company is estimated to spend $1.5 billion on content acquisition this year, roughly equal to how much Amazon.com Inc. (NASDAQ:AMZN) spends through Prime Instant Video.
Hulu currently has about nine million subscribers, up significantly from last year’s six million. However, Netflix is a juggernaut, with more than 40 million subscribers in the U.S. alone.
NFLX Stock Could Take a Hit
Netflix shares are trading at 232 times earnings. The extraordinary multiple reflects investor optimism over the company’s expected growth. As a Netflix consumer, it’s easy for me to share their optimism.
The company has vastly improved its content offering, design, and functionality. Despite the rapid expansion, there have been very few scaling issues. But past performance is not an indicator of the future, as the saying goes.
Netflix is obviously spending more for new content development, but their per-unit revenue is exactly the same. Unless they start pricing with a tiered system, whereby some premium content costs extra, how will they justify a sky-high multiple?
Don’t get me wrong; Netflix is the forerunner of online streaming. I just don’t see them maintaining the same level of control over the industry.