Netflix is Shooting Starz
byFeb 27th 2012 9:26AM
Last week was rough for Netflix (NAS: NFLX) . This week may not get any better.
The video service's streaming contract with Liberty Media's (NAS: LMCA) Starz ends on Wednesday.
It's unfortunate timing for Netflix. The dot-com enigma is coming off its largest weekly drop since mid-November, when investors were fuming over a shockingly bad third quarter and a dilutive round of financing.
Last week's 8% drop puts an end -- at least temporarily -- to an impressive turnaround in Wall Street sentiment. As bad as last year's summertime collapse was for Netflix, there was a point earlier this month when Netflix had more than doubled off of its late-November lows.
You won't find too many stocks that double in three months, especially given the baggage that Netflix is carrying.
Let me in
There are plenty of moving parts in the streaming space these days, but the biggest news last week was Comcast (NAS: CMCSA) introducing a new service. Streampix will offer select TV shows and movies to Comcast customers as streams for a mere $4.99 a month. The rub is that the new service will only be made available to Comcast's cable television customers. If they happen to have a "triple play" plan that bundles Comcast's cable, telephone, and Internet services, Streampix will actually be thrown in at no additional cost.
Netflix has gone from being the lone digital smorgasbord operator to the market leader in a quickly crowding niche in a little more than a year.
Investors are nervous, and rightfully so. Netflix is shedding lucrative DVD-based subscribers, and its streaming business is in the red as the company banks on aggressive international expansion.
Things probably aren't as bad for Netflix as the worrywarts may believe.
Netflix has market penetration that no one else can match. Armed with 23.5 million streaming subscribers, no one else can afford to build a digital catalog as deep as Netflix. Losing Starz this week will hurt, but it's not as if there's any platform out there that is somehow better than what Netflix is offering for a reasonable $7.99 a month.
Starz will leave a void.
Eyeing my own virtual queue, nine of the 76 titles in my streaming queue will be gone after Wednesday.
Couch potatoes may not view Starz as more than a second-tier premium movie channel, but Starz Play covers new releases by a few of the top studios.
If your kid, grandchild, or nephew just happens to be a Disney (NYS: DIS) buff, they're going to miss the ability to stream Toy Story 3, A Christmas Carol, and Tangled. Disney live-action releases including Secretariat and the recent Tron reboot will also be on the way out.
Sony (NYS: SNE) was also part of the Starz catalog streaming through Netflix until bandwidth caps were triggered this summer. Sony was able to pull Grown Ups, The Social Network, and the rest of its recent retail releases.
Netflix has been inking deals for new content, but the real test will be on Thursday when couch potato subscribers wake up to see a chunk of their streaming queues no longer available.
Even after peaking earlier this month, Netflix shares were still fetching less than half of its summertime highs. In other words, it's not as if the bulls can say "I told you so" at this point.
Netflix will be challenged. After years of profitable growth, the company is expected to post a loss this year. The competition will be real. No one may match Netflix's offering, but they all have unique ways to compete on either price or platform.
Starz will be gone this week, but the show must go on at Netflix.
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At the time this article was published Motley Fool newsletter services have recommended buying shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz has been a Netflix subscriber and shareholder since 2002. He does not own shares in any of the other stocks in this story, except for Disney and Liberty Media. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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