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Analyst: Netflix Streaming Prowess ‘Unlikely to Waiver’

18 May, 2011 By: Erik Gruenwedel

Netflix’s dominance as a subscription video-on-demand (and by-mail disc) rental service shows no signs of weakening, despite increased competition from Amazon, Google and Hulu, among other issues, an analyst said.

Eric Wold, research director at Merriman Capital in San Francisco, said a recent Sandvine report highlighting Netflix’s 43% increase in peak Internet traffic since last fall should dissuade bear investors concerned about the service’s rapidly escalating content license spending and top-heavy stock evaluation.

Wold, among other analysts, believes Netflix will spend upward of $1 billion on content deals this year. With Netflix aggressively transitioning from disc rentals to streaming, the service’s projected 10 million subscriber growth in 2011 should generate higher margins.

Specifically, if those 10 million subs primarily stream, content delivery costs would hover around $500,000, compared with about $24 million when shipping and processing discs, according to Wold.

Analyst Michael Pachter with Wedbush Securities in Los Angeles counters that Netflix’s burgeoning content acquisition spending more than offsets savings in digital distribution. Pachter believes that spending will greatly effect Netflix’s earnings growth and is the genesis for management’s “limited” financial guidance.

“We think that the cost of content deals is rapidly outpacing postage and DVD savings, and believe that future earnings growth will be far slower than the current share price implies,” Pachter wrote in a recent note. He believes Netflix content spending could top $1.9 billion in 2012.

Wold, however, believes the issue is not just the amount of content spending, but rather the quality of the deals (non-exclusive) that affords Netflix the ability to bargain more competitively with studios versus locking in pricier exclusivity.

“We do not believe having a small piece of the overall content pie available on another platform would be enough to draw away Netflix subscribers — existing or potential,” Wold wrote in a May 18 note.

The analyst believes Netflix is holding back earnings growth now in order to drive increased earnings leverage in future periods, which he said should also expand valuation multiples.

“While competitors are increasingly focusing on Netflix's market, we continue to believe [its] lead is formidable and the value proposition is compelling,” Wold wrote.


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