Netflix Inc.’s (NFLX) much awaited international project finally shaped up as it launched its unlimited online streaming services in UK and Ireland on Monday. Netflix with its monthly subscription rate of 5.99 Pounds Sterling in the UK and euro 6.99 in Ireland will likely give the present video streaming providers in these markets a tough competition. Netflix subscribers in the region can log in to Netflix.com through any internet-connected devices and avail the services.
The Preparation
Over the past few months, Netflix had been strengthening its content library for a triumphant debut in this cross-Atlantic territory. Netflix’s licensing agreements with Lions Gate Entertainment Corp. (LGF) and Metro-Goldwyn-Mayer Studios Inc. for exclusive streaming rights in the U.K. and Ireland will also come in handy. Netflix will also stream Miramax films. Moreover, Netflix will stream movies and shows from Momentum Pictures, Viacom International Media Networks, Twentieth Century Fox, Sony Pictures Entertainment, Paramount and NBCUniversal.
The Strategy
Netflix has priced its service £1 more than Amazon.com Inc.’s (AMZN) Lovefilm, which has a introductory subscription price of £4.99 per month for its exclusive online services in UK. Nonetheless, Netflix expects to gain traction on the back of its varied content. Moreover, video on demand market in UK is expected to surge by 35% to £379 million from a mere £11 million just five years ago, according to Screen Digest. Netflix is up in arms to grab this million dollar opportunity by showcasing the films and TV shows in hi-definition and with Dolby Digital Plus 5.1 sound quality.
The Competition
Nonetheless, the company will have to battle it out in the U.K. and Ireland to pick up a dominant share in the market, as there is no dearth of streaming providers with good and popular content. Apart from Amazon’s Lovefilm, the aforesaid market has other online players such as Channel 4, the BBC, British Sky Broadcasting Group Plc and ITV Plc.
The U.K. and Ireland has higher internet penetration rate. However, execution risks are high. Although Netflix has entered into licensing agreements with big production houses, we believe that competing with the existing players would be a challenge for the company. Moreover, since most of the existing players are local, they definitely have better knowledge about public preferences and the local flavor.
The Domestic Challenges
Amidst its competitive pressures in the European region, Netflix also has issues to deal with in the domestic market. The company’s DVD business is going to be hit by the possible delay by Warner Bros. which has extended its 28-day delay on DVD rentals to approximately 56 days. This could affect the company’s DVD subscriber base negatively. However, Netflix has no better alternative than to comply with the new extended delay period, as buying DVD’s from external source will increase the costs. Netflix gets the Warner Bros. DVD at a discounted price.
In the recently concluded quarter the company has 14 million DVD only subscribers. Sadly, that figure is expected to dwindle to a low of 10.3 million in the current quarter. This would have a significant impact on the results of the company.
Our Take
However, Netflix remains a force to be reckoned with in the streaming market. In the fourth quarter of 2011, Netflix clocked more than two billion hours of movies and TV shows. Netflix signed a number of licensing deals in 2011 with big Hollywood production houses providing varied content.
We maintain our Neutral recommendation over the long term (6-12 months). Despite the higher costs, we think Netflix will probably see sales strengthening, as subscribers take note of its improving portfolio. This would ultimately enable the company to build a position for itself over the long term.
However, we believe that increasing costs related to licensing and renewal fees and higher capital expenditure due to international expansions can hurt growth in the near term. We currently have a Zacks #3 Rank on Netflix, which translates into a Hold rating in the short term.
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