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Rest in Peace, Netflix

2 big problems will dog the streaming video company in perpetuity

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Geography and Delivery

Cablevision (NYSE:CVC) now offers Cinemax and HBO content online through services called HBO Go and MAX Go. Comcast (NASDAQ:CMCSA) soon will be offering its own streaming service called Streampix, at a slightly lower price than Netflix’s online-only option. More alternatives are on the way, too, each one of which is a threat to Netflix.

The fact that newcomers are flooding the market in droves should come as no surprise, since there is no real barrier to entry.

Starting a cable television company requires miles and miles of cable lines, satellite equipment, an entire staff of service people and technicians to distribute and install set-top boxes, and so on. That’s why it’s a rarity to have more than one or two cable providers in any given market — it’s just not fiscally feasible to support them.

Starting a digital online television service, on the other hand, really only requires a few storage servers and a place to put them. In all seriousness, anyone with some licensed programming content could start a digital TV service in a weekend in their garage. Geography is irrelevant.

That low-overhead situation was great for Netflix a few years ago when it was developing the industry. That same low barrier to entry, however, is preventing other players from entering the same market.

One could argue a competitor might have a different or inferior collection of content compared to Netflix, and perhaps they do. In business, though, there is one certainty — there’s always competition out there willing to give more and charge less.

Bottom Line

While there are only two key problems for Netfliix, they’re a pair of big problems. In fact, they’re fundamental problems that chip away at the very core of the Netflix business model.

Unless Netflix can find a way to convince studios and distributors to want less (not likely) and simultaneously convince cable companies to stop adding online offers of their own (also not likely), Netflix might find it’s powerless to stop its own bleeding.

Oh well. It was good while it lasted.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/rest-in-peace-netflix-nflx/.

©2014 InvestorPlace Media, LLC

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