I can’t think of another multi-billion dollar company that has as many basic fundamental problems as much as NFLX. (I’m not referring to last week’s article on NLFX’s Off Balance Sheet concerns. We’re talking about real basics here.)
Netflix, meet Porter… As in Porter’s Five Forces.
- Threat of New Entrants.
This has a lot to do with a business’ Barriers to Entry. If a business is profitable and doesn’t have high barriers to enter that field, other companies will come into that marketplace and compete.
In NFLX’s case, while the large content costs can deter smaller new entries to this market, there are many large and well funded companies that are interested in this space. A perfect example is VZ & CSTR JV “Redbox Instant by Verizon”. Other Cable & Satellite companies, other Telcos, even names like WMT & BBY have either already entered (& exited) or have shown interest in entering the space.
- Threat of Substitute Products.
The Threat of New Entrants were for the exact (or relatively similar) product. Now we’re talking about a substitute product that will deter customers from using NFLX.
AAPL & GOOG are looking to enter the TV space, (depending on their final products,) they’re clearly a threat. Another example is HBO (with “HBO Go”) & other content companies developing a new method of distribution for their content.
- Bargaining Power of Customers.
How much more can a company charge for their goods? (or more likely in our case…) How much less will they have to charge to keep their customers happy?
If you sign a two year contract with VZ, (and they subsides your cell phone’s cost), you’re locked in. Call them to cancel/negotiate your contract and see what happens. You have almost no bargaining power.
What does NFLX have on you? They tried (multiple times) to change the pricing of their services (in almost every case to try and make more money), each time it ended with a debacle.
- Bargaining Power of Suppliers.
Here we are talking about input costs. The money companies have to PAY to suppliers to create their products.
As competition continues to kill the industry participants, there might be a time where there will be so few purchasers of content that the survivors will have some bargaining power, but as of now – just look at NFLX’s recent contract renewals – suppliers have the upper hand.
- Competitive Rivalry within an Industry.
This all about intensity. In some industries, competitors work together as an oligopoly, and together try to keep the advantages of a monopoly.
When your largest competitor (AMZN) doesn’t care about profits, I think it’s fair to say you’ll have tough competition. They keep on adding more & more content to try to build their “Prime” eco-system making NFLX’s product less valuable by the day. Of course Hulu, HBO Go, VZ-CSTR etc are not too friendly themselves.
Porter’s Five Forces might not be as exciting as finding accounting irregularities, but they highlight the real pressures on a company’s fundamental metrics. The combination of the above leads me to believe revenue growth for NFLX will continue to slow, margins will continue to get crushed, which will cause any remaining profits to vanish.