Netflix seen as a casualty of the heightened competition
There’s an interesting post on Seeking Alpha this week reviewing the Internet TV landscape following Cisco’s insertion into the market via its Videoscape launch at CES. Entitled, “The Internet TV War and Its Potential Casualties,” the post handicaps the players in the market – Netflix, Apple, Google, Roku, perhaps Motorola, and now Cisco – and concludes that Netflix will be the first to go.
The post, written by Albert Babayev, an analyst at Westfield Capital and author of the Alpha Bias investment blog, states that Netflix, due to its thin margins, will not be able to “sustain the high level of competition.” Babayev then goes on to break each publicly traded competitor down based on operating margin, and cash and short term investments (a table is included in his post):
Comparing the companies at a high level shows that Netflix is the loser in Operating Margins and Cash and Short Term Investments growth among competitors, pointing to their potential weakness in fending off competition.
Babayev also notes that revenue and profit per customer have dropped markedly over the past five quarters – revenues by $5 per customer and profits by 23%. He says this suggests a lower willingness by the consumer to pay for the product.
The number of unpaid Netflix customers has also increased. The company offers a free one-month trial of the product but customers are getting savvier and more price conscious now, given the increased competition, Babayev notes.
Babayev concludes that the growth expected of Netflix may be impossible to achieve given the heightened competition and smarter, more discriminating consumer base:
From a financial standpoint, Netflix is in extremely dangerous territory and may be the first to lose the Internet TV war among its competitors. Expect a significant drop in market cap during the next few months.
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