Netflix Original Niche Challenged In Intensely Competitive Market

Online streaming pioneer Netflix (NASDAQ:NFLX) trades about 5,000% above its 2002 IPO price, but it is no stranger to sell-offs.

The stock tanked 24% in the week after the Los Gatos, Calif., company raised prices in September 2011. It collapsed 28% in July 2012, as analysts slashed price targets after the company’s second-quarter results.

This time around, in the week ended Oct. 17, the stock dropped 21% after Netflix reported much-weaker-than-expected subscriber growth and cinched down its fourth-quarter guidance.

Game of Thrones is just one of the blockbuster series HBO and CBS are streaming online in the battle for market share with Netflix and Amazon.

“Game of Thrones” is just one of the blockbuster series HBO and CBS are streaming online in the battle for market share with Netflix and Amazon. View Enlarged Image

The sell-off also reflected some outside influences. HBO announced on Oct. 15 its own streaming video service for noncable subscribers for next year.

A day later, CBS rolled out a $5.99 monthly subscription streaming service featuring broadcasts from 14 stations it owns.

The combination of slower subscriber growth and rising competition have investors and analysts focusing their microscopes on the online streaming entertainment space, the crossroads of Internet, TV and film entertainment homesteaded by Netflix.

The company, which started as a mail-delivery DVD movie rental outfit, will invest $3 billion this year in program content to help satisfy the diverse entertainment tastes of more than 36 million U.S. and 14 million international subscribers. As a rising number of pay-TV consumers face price hikes and consider cutting the cord to their subscription cable and satellite TV, Netflix will spend $600 million on marketing this year and $400 million to improve technology.

Such investments aim to shore up the Internet movie and TV series network’s position in an intensely competitive and rapidly changing market.

Netflix CEO Reed Hastings was upbeat in a Q3 conference call on Oct. 15, the same day HBO announced its online initiative, when noting that Netflix is adding “about a million subscribers a month” and expects 4 million in Q4.

HBO was just one more signal that the entire society was migrating to Internet TV, Hastings said. “There’s a lot of feeling that just everyone is going there. … Think of all the big networks moving to Internet video, and it’s just becoming a very large opportunity.”

Despite Netflix’s latest forecast that earnings will drop nearly 44% year-over-year in Q4, it is on track to surpass 50 million subscribers by 2017, says RBC Capital Markets analyst Mark Mahaney.

“The company still has plenty of content, marketing and market-expansion levers to achieve global subscriber levels nicely in excess of 100 million long term,” Mahaney said.

Since Netflix launched its streaming service seven years ago, it has evolved to become “more than just an aggregator and distributor of other people’s content — and much more of a programmer” said Jenny McCabe, a Netflix spokeswoman.