Article / 17 October 2016 at 12:52 GMT

Three's a crowd as Netflix 'endgame' under fire: Garnry

Managing editor, / Saxo Bank
  • Downstreaming platform Netflix reports Q3 earnings tonight
  • Netflix unable to establish itself as dominant market player
  • Amazon, Time Warner muscling their way into the market
  • Netflix subscriber numbers have disappointed through 2016


Some of the cast of 'Orange is the New Black' gather for
yet another awards ceremony. Photo: WikiCommons Media

By Martin O'Rourke

Film and TV platform Netflix reports its third-quarter earnings this evening and this looks like something of a make-or-break quarter for the US downstreaming site after a disappointing year thus far has kept the share price predominantly beneath $100.

For some perspective, the erstwhile market-darling stock was above $130 in December 2015 as its fortunes soared on the back of strong, original content such as House of Cards, Orange is the New Black and Making a Murderer.

In particular, the streaming table-topper has been under scrutiny for its failure to transition potential customers into actual subscribers with a reported additional 2 million new viewers in Q1, as an example, some 1.5 million less than had been expected. While revenue growth for the same quarter year-on-year was up by 24.5%, concerns regarding the long-term strategy for Netflix were laid bare and have, frankly, been glaringly obvious ever since.

"The original thesis for Netflix was that it would own the global distribution channel of video streaming content and that there would be a network effect leading to one dominant player," Saxo Bank's head of equities strategy Peter Garnry tells in interview. "That might still be the endgame but it looks increasingly like it may not be Netflix."

"It's two biggest competitors Amazon and HBO have intensified the competition and surveys suggest consumers are willing to have multiple subscriptions depending on the content," says Garnry. "This means that no one will likely own the distribution channel leading to less bargaining power over third-party content providers."

HBO owner Time Warner has already made its intention clear on grabbing its share of the downstreaming market and with high-performing content like Game of Thrones on its roster, it has forced Netflix down a costly two-pronged strategy of generating original content and buying in content at considerable price to try to keep ahead. Unfortunately, the tailoff in subscribers required to finance that content outlay has come at just the worst time for Netflix.

The peaks and troughs of a downstreaming share price over the past 12 months

Source: SaxoTraderGO

"We expect continued hangover effects from its big global launch in Q1 with costs still running high and some new markets still being inefficient," says Garnry. "The Q4 outlook is key and will be the dominant driver of the market’s response to Q3 earnings."

Netflix share price was at $101.47 going into the New York open with analyst consensus split on the share. Garnry is quite clear. however, that Netflix is off his radar. "The industry dynamics are changing and we cannot justify the current valuation based on the current outlook," he says.

"Netflix’s market share in North America could also be the downside driver as competition has intensified enormously in North America with Amazon especially being a fierce competitor using its financial power from its e-commerce and AWS businesses to expand rapidly in video streaming."

The intensification of the competition has meant that the disrupter has now become the disrupted and forced it on the defensive against powerful, ruthless competitors. And that, ultimately, has to be extremely good news for the customer.

"Netflix, Amazon and HBO cannot capture a large share of the value from third-party content providers and thus have to create their own content," says Garnry. "We see this trend continue and in the end an industry moving towards further vertical integration forcing existing content providers to consider their strategies."

What does that ultimately mean for Netflix? At best, it can hope to remain a significant player in the market which does have growth potential as the likes of China, India and Brazil come on board (although canny Chinese buyers have already found alternative means of getting the content they want at a cheaper price.).

At worst, Netflix' ambitions will have to be reined in significantly. And that may be something the California-based company with the big dreams might just have to get used to.


Will Netflix be in the money tonight? Photo: Saxo Bank

Martin O'Rourke is managing editor at Saxo Bank


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