Can Netflix and Disney Make Amazon Insecure?
Although Netflix's deal does not adversely impact upon Amazon's overall growth potential, I wonder if the lure of Disney will be enough to convince investors to be patient until the company can generate meaningful returns on its capital. Although Netflix has been growing revenue, profits have lagged. That wasn't the worst of it.
Netflix's situation looked even more grim three months ago when Amazon announced its content deal with premium TV joint venture Epix. This was Amazon's attempt to steal would-be Netflix subscribers. The deal allowed Epix to offer content to Amazon's Prime instant Video streaming service, including several popular hit movie titles such as The Hunger Games, Thor, The Avengers, Iron Man 2 and many more.
What the deal also meant was Netflix's partnership with Epix was no longer exclusive since Netflix allowed the agreement to lapse, which left the door open for Amazon. At the time, I asked what Netflix was thinking. How could a company already dealing with competitive pressures from the likes of Time Warner (TWX) and Coinstar (CSTR) (Redbox) allow such an advantage to slip away?It seems the Disney deal answered this question. But it's going to take some time.
Although Disney will bring several advantages by allowing Netflix subscribers to stream not only Disney movies but also those from subsidiaries including Pixar and Marvel, this won't take effect until 2016. In the meantime, Netflix will have to execute perfectly and hope that the world's fiscal concerns improve.
Although "the world" seems like a bit of an exaggeration, the rate at which Netflix is pushing towards international expansion suggests the company is indeed trying to conquer the world. But I think Netflix has been spending too much money to do it.
On the other hand, it seems Netflix's revenue have been growing well enough to justify some of these expenses -- but for how long, especially after reporting third-quarter earnings where net income dropped by 90%? Nonetheless, this Disney deal is certainly encouraging news for investors until Netflix can reverse the profitability trend.
The good news is subscriber defections have note only stabilized but are now growing at an impressive rate. During the most recent quarter, the company was able to gain two million streaming members, bringing its worldwide total to 29 million. Likewise, U.S. subscribers grew over 20% year-over-year and now the rate stands at a total of over 25 million.