But Hollywood has long been one of America’s most influential exports, andNetflix ( NFLX ) has become a dominant portal for the product.
The world’s infatuation with U.S. film and other Western content plays well for streaming king Netflix.
“This is an American brand with American content,” FBR Capital’s Barton Crockett told IBD.
As old media struggles to keep pace with the new modes through which viewers consume content, Netflix has stayed ahead of the curve and become virtually ubiquitous in the U.S. — and shows rising strength abroad.
The video-streaming site’s subscriber base, with 42 million in America and 23 million internationally, has made it “one of the largest global entertainment subscription businesses,” said RBC Capital’s Mark Mahaney in a July 15 research report.
Netflix faced high expectations for U.S. and international subscriber gains in the second quarter, and beat them.
“The year-over-year acceleration in subscriber additions suggests we’re only in the fourth or fifth inning,” Mahaney said in his report. “With over 65 million subscribers, NFLX is a Global Media Platform with mounting profitability and increased evidence of pricing power.”
That strength is partially reflected in Netflix’s stock.
It has an IBD Composite Rating of 84 out of 99 amid three straight quarters of earnings declines and a forecast of a 58% EPS slip this year.
The stock has an A Accumulation/Distribution rating — which signals that institutional investors are gobbling up shares. Shares on Friday were trading up 117% this year, even after two days of sharp declines spurred by the market’s sell-off.
“The beauty of Netflix is that they have such a broad selection of content,” Crockett said. “No single show is more than 10% of what people are watching on the service.”
Original content has been a huge demand driver for the streaming company, with shows such as “Orange Is the New Black,” “Daredevil” and “Sense8” bolstering subscriber growth.
Battling For Cord-Cutters
The services that can be considered Netflix’s peers are growing.
Competitors at the top of that list areAmazon.com (AMZN) and Hulu, owned byWalt Disney (DIS), 21stCentury Fox (FOXA) andComcast’s (CMCSA) NBCUniversal.
“Amazon and Hulu have been completely overshadowed by Netflix, but that’s changing,” Crockett said. “They’re getting more aggressive with their investments, but the traction that they’re gaining doesn’t seem to be affecting Netflix.”
Crockett takes the view that the three services are complementary.
Amazon has an advantage in that, in addition to free shipping with a Prime membership, subscribers can get extra value from Amazon original series like “Transparent” and “Alpha House.”
But that alone “won’t make you turn off Netflix,” he said.
Neither will having a Hulu subscription.
In part, that is because viewers prefer Netflix’s lack of advertisements and because the content is different.
Exhibit A: Netflix has “Friends,” while Hulu has “Seinfeld.”
Individual television networks and pay-TV services are also vying for cord-cutters, typically seen as millennials who have chosen to stick to streaming vs. cable or satellite contracts, with their own digital content subscriptions.
This month,Time Warner’s (TWX) HBO signed a pact with Sesame Workshop to gain exclusive pay-cable and streaming rights to “Sesame Street” and other children’s shows from the studio.
Both Netflix and Amazon had deals with “Sesame,” but those rights are set to expire this year.
Sticky Content, Skinny Bundles
HBO’s “Sesame Street” move highlights the desire for streaming content providers to include more sticky content, shows that will convince subscribers to stay with their contracts from month to month rather than cancel them, say, during the off-season of “Game of Thrones.”
And since Netflix encourages binge-watching with the release of all episodes for a season of its original shows at once, variety of content has high importance.
“Netflix combated this risk (of binge-watching leading to canceled subscriptions) by adding a significant amount of content that targeted all members of the family, with children’s content a critical glue to its offering,” according to BTIG analyst Rich Greenfield, as quoted by Bloomberg in a recent article.
Dish Network (DISH) has also made a notable entrance to the streaming space with Sling TV, a skinny streaming-only TV bundle that includes content from Disney’s ESPN and Disney Channel, AMC Networks, Food Network, TNT and more for just $20 a month.
Apple is also expected to eventually offer a skinny live TV bundle, but the service is reportedly being delayed until 2016 as licensing talks with networks progress slowly.
Crockett doubts that skinny-bundle streaming services will gain much traction.
“Services that aspire to be a replacement for a pay-TV service don’t seem to have anywhere near the interest as Netflix does,” he said. Netflix is “totally different” from pay-TV, skinny bundles are not.
“If anything, it (the existence of skinny bundles) will help Netflix because it’ll get people streaming more,” Crockett said.
Old Media: Not Dead Yet
Major media stocks, including Disney,Viacom (VIAB), Time Warner and Fox, were pummeled this month in the wake of generally soft earnings reports and fears of a collapse of the pay-TV ecosystem.
Disney started the sell-off, with a warning of slowing revenue growth from affiliate fees.
The House of Mouse also cut its ESPN subscriber guidance, saying it saw modest subscriber losses from the powerhouse sports network during the quarter. Sports content is its the biggest driver of affiliate fees.
Both Disney and Time Warner received downgrades from Bernstein Research in the past week after their quarterly reports boosted concerns that more viewers were shifting from cable to online viewing services.
But is the sky really falling on the gray media companies?
“I don’t think old media is dead,” RBC Capital Markets’ David Bank told IBD. “I think old media is growing less rapidly than it was before.”
While Netflix is eroding viewership for core TV audiences and offering a lower-cost option to traditional TV, Bank says the pay-TV ecosystem has its own brand of stickiness and isn’t prone to change rapidly.
After all, the data show that pay-TV subscribers are going down 1% right now, according to Crockett, in part because it’s hard for people to give up their service since it’s bundled with broadband.
He also cites a recent FBR study that found 40% of homes that have Netflix say they love the streaming service just as much or more as pay-TV — something he calls astonishing.
Friends Or Foes?
A large slice of Netflix’s astonishing service owes to content licensing deals with firms such as Disney,Dreamworks Animation (DWA), Lionsgate Entertainment and AMC Networks — which make up the vast majority of its library of TV shows and movies.
The door also swings the other way, with Dreamworks recently calling Netflix an “incredible partner.”
Disney CEO Bob Iger said in the company’s Q2 earnings call that Netflix was “more friend than foe” and an “aggressive customer.”
Coming up, Disney is providing Netflix with “some pretty strong content” with its Marvel and Star Wars franchises, Crockett noted.
Inching Into China
Weinstein Co. is producing “Crouching Tiger, Hidden Dragon: The Green Legend” for its Aug. 28 debut on Netflix and in select globalImax (IMAX) theaters, including in China. The Netflix-backed project enables the streaming company to indirectly reap profit from the largely untapped Chinese market, which is controlled by government censorship.
For now, Netflix doesn’t need anything meaningful to come out of China, Crockett said, since its other international markets are just taking off: “If Netflix stays at this kind of run rate, with people liking it just as much or more as pay TV, that’s powerful in the U.S. and exportable around the world.”