Can Netflix Survive the Streaming War?

The battle for supremacy in online video streaming really began in January 2008. It was then that a relatively obscure DVD-by-mail company announced that its customers could enjoy unlimited online streaming of its modest library of movies and TV shows.
A few months later, that DVD-by-mail company – Netflix (NASDAQ: NFLX) – announced a major content agreement with entertainment group Starz (NASDAQ: STRZA).
As Netflix signed more content agreements, its library expanded and online streaming grew into the single largest type of Internet traffic.
While Netflix may have been at the center of this new industry, it certainly isn’t the only company vying for a piece of the action. Indeed, Netflix faces threats from some of the world’s fiercest competitors.

• Google’s (NASDAQ: GOOGL) YouTube is the third most popular website in the United States, behind Facebook (NASDAQ: FB) and Google itself.
• Wal-Mart (NYSE: WMT) has its own online streaming product, Vudu.
• Amazon (NASDAQ: AMZN) continues to build its Prime Instant Video library and offers the online streaming service as part of its Amazon Prime subscription service.
• Apple (NASDAQ: AAPL) had never been a major player, despite its Apple TV being on the market since 2007. That all changed when it announced a partnership with Time Warner’s (NYSE: TWX) HBO and dropped the price of its Apple TV by 30%. The company is also widely rumored to be coming out with a subscription service this fall.
• Hulu is a joint venture between Twenty-First Century Fox (NASDAQ: FOX), Disney (NYSE: DIS) and Comcast (NASDAQ: CMCSA).

The business model of Netflix is largely focused around online streaming and increasing the number of people who subscribe to its services. Not so for most of Netflix’s competitors.
Google is primarily interested in advertisements, and uses online streaming as a way to bring eyeballs to its lucrative YouTube front page and targeted advertisements.
Wal-Mart is, first and foremost, a retailer. The company is interested in selling Internet-connected television, as well as DVDs that include promo codes to add purchased movies to consumers’ Vudu online library.
Amazon has seen tremendous success with its Amazon Prime program, a service that boosts repeat business and the amount consumers spend on the website. For Amazon, Prime Instant Video feels like a great perk that is secondary to the free two-day shipping included with Amazon Prime.
Apple wants to sell you devices. Of course, the company makes money when you buy a movie in the iTunes store or sign up for its partner streaming service, HBO Now. But online streaming is clearly meant to direct consumers to Apple devices.
Hulu employs a “freemium” model. It allows consumers to access a wide range of content after subjecting them to several minutes of ads. It also offers a subscription service that is ad-free and backed by a considerably larger library.
Each of these companies does more or less exactly what Netflix does – but as a way to support their core businesses. With the exception of a few exclusive content agreements and original series like “House of Cards,” there is no difference between what Netflix offers and what Amazon’s Prime Instant Video offers.
In an environment where competitors are increasingly willing to give away Netflix’s core business – online streaming – as a way to support their own core businesses, I think Netflix will have an incredibly tough time staying relevant.
Still, the stock trades as though Netflix is the king of the market, with a price/earnings ratio of 97.7. By comparison, the P/E ratio of the S&P 500 is around 19.6.
Netflix’s valuation is far too rich for my liking, especially considering the struggles it’s sure to face in the growing streaming wars. Buyer beware.
DISCLOSURE: I personally own shares of Apple.

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