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Streaming Movies - How Netflix Would Fare In 2013?

 January 03, 2013 01:02 PM

(By Mani) Heading into 2013, Netflix, Inc. (NASDAQ: NFLX) would remain the dominant streaming video service provider by a wide margin. Currently, it accounts for 33 percent of downstream traffic on fixed networks in North America during peak hours, according to Sandvine.

Netflix is the world's leading Internet television network with more than 30 million members in 40 countries enjoying more than one billion hours of TV shows and movies per month, including original series. For one low monthly price, Netflix members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen.

[Related -Netflix, Inc. (NFLX) Q4 Earnings Preview: What To Watch?]

While competing video services, including Amazon, Hulu, and HBO GO, are often mentioned in the same breath as Netflix, these services still trail Netflix by a wide margin. In other words, Netflix generates 18 times more traffic than Amazon, 22 times more traffic than Hulu, and 62 times more traffic than HBO GO.

"Although Amazon and HBO do not report their streaming video viewer figures, we know Hulu has approximately 3 million subscribers in the US versus 24 million paying Netflix streaming subscribers," BMO Capital Markets analyst Edward Williams said in a client note.

As a result, competing services are unlikely to challenge Netflix for market dominance anytime soon.

Moreover, the recent deal with The Walt Disney Co. (NYSE: DIS) is a major win as the deal has strengthened Netflix's exclusive content in differentiating its streaming video service among competitors and is expected to have a positive impact on US streaming subscribers trends.

[Related -Netflix, Inc. (NASDAQ:NFLX): Can Netflix Trump Amazon.com, Inc. With New Plans?]

The new multi-year licensing agreement makes Netflix the exclusive U.S. subscription television service for first-run live-action and animated feature films from The Walt Disney Studios.

Netflix captured the exclusive rights for Disney movies in the pay window starting for films released in 2016. The pay window is about a year post film release and so Netflix will start airing the new 2016 Disney film releases on its service starting the end of 2016 / beginning of 2017.

"While the companies did not provide financial details of the agreement, we believe the deal is in the ballpark of $300 million per year. We expect the company to continuously adjust its content portfolio with changes in demand from the subscriber base," Williams noted.

Meanwhile, Netflix would go social in 2013. Congress passed a new bill amending the Video Privacy Protection Act, which would be signed into law shortly. The bill allows companies such as Netflix to share video preferences of consenting customers unless they opt out.

Netflix has confirmed the company will introduce social features for US members in 2013 that might be integrated with Facebook, Inc. (NASDAQ: FB) and could boost the domestic subscriber base as it may become easier to share what you're watching.

On the flip side, Netflix service experienced two disruptions around the holidays – one brought on from a technical error at AWS and the other from an internal error. But, these outages are not expected to have a sustained negative impact on the Netflix subscriber base.

"At the same time, the widespread coverage of the outages highlight, in our view, how critical the service is becoming to tens of millions of subscribers," Williams said.

Netflix is facing budding competitors such as Amazon.com, Inc. (NASDAQ: AMZN), Dish Network (NASDAQ: DISH) Blockbuster and Comcast Corp. (NASDAQ: CMCSA).

Netflix also faces stiff rivalry from Verizon Communications, Inc.'s (NYSE: VZ) online venture with Coinstar Inc.'s (NASDAQ: CSTR) Redbox. Redbox Instant by Verizon recently launched its public beta test with an $8 monthly subscription service for four one-night physical disc rentals, in addition to unlimited streaming.

"We do not expect the new streaming service will have a meaningful impact to Netflix's business given that Redbox has a significantly smaller library of streaming content library that excludes TV shows and primarily consists of the same movies from EPIX available through Netflix," Williams noted.

In addition, Amazon recently launched Amazon Video service on the iPhone and iPod Touch, further extending the reach of its video services. Amazon also entered an exclusive agreement with Turner Broadcasting and Warner Bros. Amazon recently shuttered plans to offer a $7.99-a-month Prime subscription after a two-week test period.

"Although Amazon Prime offers subscribers a compelling video streaming service, we do not believe it rivals that from Netflix," the analyst added.

Netflix's long-term strategy and first-mover advantage remain intact as its streaming business continues to grow in the US and abroad. Netflix is poised to capitalize off the growth of streaming video over the next several years as it expands the breadth of its streaming content and penetrates additional international markets.

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