Friday, April 17, 2015

5 Things Netflix Must Do to Stave Off the Competition (NFLX)

Competition is heating up, but Netflix isn't ready to cede its throne

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Netflix, Inc. (NASDAQ:NFLX), the undisputed leader in streaming television, released its 2015 first-quarter earnings on Wednesday, April 15.

Management reported an additional 4.8 million new subscribers during the quarter, including 2.28 million in the U.S., which exceeded analyst forecasts by 21%. The Netflix earnings report also included $1.57 billion in earnings revenue and EPS of 38 cents per share.

Netflix stock spiked almost 15% after the opening bell on Thursday, as investor confidence peaked and brought NFLX shares to a new all-time high. The stock currently trades above $570, but FBR recently upgraded Netflix stock with an astonishing price target of $900 per share.

FBR cited a recent survey wherein 49% of NFLX subscribers admitted to spending more time watching Netflix than ordinary cable television and 57% of survey respondents said that they would choose Netflix over cable if they were forced to pick only one.

Since the beginning of 2013, Netflix stock is up almost 540%. But, how can the company keep profits rolling in and stave off the competition? Following are five things NFLX must do to remain the undisputed king of streaming television.

Continue Producing High-Quality Original Content

Having consistently new and fresh original content available for viewers is paramount for Netflix’s long-term plans. Last month, NFLX CEO Reed Hastings told CNBC’s Fast Money that the company plans on having something new and fresh to watch every four weeks.

BTIG analyst Rich Greenfield noted that last year’s return of House of Cards correlated with a boost in new sign-ups. The fact that Kevin Spacey won a Golden Globe for his role in House of Cardsillustrates the power and quality of Netflix’s production capabilities.

Considering that Time Warner Inc (NYSE:TWX) recently launched a standalone version of HBO, competition in the streaming space will quickly heat up this year.

Netflix eventually surpassed HBO’s subscriber numbers in the U.S., but according to Bloomberg, Time Warner’s recent breakdown of HBO’s profit figures reveals that the cable company’s subscriber base dwarfs that of NFLX. NFLX has 57 million subscribers, while HBO boasts more than 114 million.

With HBO’s standalone service being rolled out across the country, Netflix must focus on producing the highest quality original content, or risk losing valuable customers to Time Warner’s streaming HBO service.

Expand Partnerships

To better compete with increasing competition from the likes of Time Warner’s HBO, Google Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube, and, Inc.’s (NASDAQ:AMZN) Prime video service, Netflix should maximize the reach and influence of partners in the television and digital media spaces.

Last December, NFLX and DISH Network Corp (NASDAQ:DISH) announced a partnership to provide Netflix video services to Dish subscribers by integrating Netflix software into Dish’s set-top boxes, called Hoppers. Current Dish customers who are also Netflix customers can now quickly switch from one service to the other using a single remote control and video input.

The arrangement does not impact the price of either subscription, but rather serves as a convenient way for viewers to utilize both services.

No statistics were available from Dish to estimate what percentage of the satellite television provider’s 14 million current subscribers are simultaneous Netflix subscribers. However, any increase in the Dish subscriber base is free, endorsed exposure for NFLX.

Arrangements like this, which push the Netflix brand in front of higher numbers of potential subscribers, have the power to further entrench the video streaming service as the nation’s go-to choice for the best in video-on-demand. Management should seek to expand such agreements and strike new deals for even wider global exposure.

Recruit More Top Talent

At the end of last month, Netflix announced the expansion of its board of directors from seven individuals to nine. Brad Smith, who has served as general counsel for Microsoft Corporation (NASDAQ:MSFT) since 2002, is now the only member of the board to hold a JD degree. His extensive legal experience with MSFT will play a key role in NFLX’s global expansion.

Anne Sweeney, who spent more than 30 years managing various cable, broadcast, and satellite properties for Walt Disney Co (NYSE:DIS), is a digital delivery and strategy expert whose vision for the future of online entertainment could be just what Netflix needs to dominate the market.

As NFLX continues its push for international superiority, having top legal and strategy talent is a must, making the addition of Smith and Sweeney a no-brainer. Continuing to seek out and recruit top industry professionals will help the company’s domestic and global expansion proceed more smoothly.

Grab Some Sports Action

Perhaps the only aspect of traditional cable television service that’s not currently available through Netflix is live sports coverage. NFLX has never bid on the rights for football, baseball, basketball or any other national events.

Coverage of major sporting events remains the last stronghold controlled by traditional cable companies such as Comcast Corporation (NASDAQ:CMCSA), and is one of the top reasons that many consumers hesitate to cut the cord entirely.

Without cable service, it is often challenging — sometimes impossible — for consumers to find a reliable method of viewing sports at home.

Netflix isn’t in the live streaming business, which explains management’s avoidance of sports coverage. However, if the company can implement a successful delivery system for live sports streams, and obtain broadcast rights for some major events, there would be nothing standing in the way.

When subscribers can view live sporting events and games from the NHL, NBA, NFL, NCAA, MLB, and Nascar, only then will Netflix be able to deal a final killing blow to traditional cable TV services and take its seat at the head of the digital entertainment table.

Split NFLX Stock

Last week, Netflix announced plans to have shareholders vote on a stock split at the upcoming annual meeting in June. If a majority of current shareholders approve the proposal, management will be granted the right to issue as many as 5 billion new NFLX shares.

It’s unlikely that all 5 billion shares would be issued immediately, but that many approved shares in reserve is consistent with other tech behemoths such as Microsoft and Apple Inc. (NASDAQ:AAPL). Unlocking such potential would give management a number of options for the future, including raising capital and boosting executives’ stock-based compensation.

Additionally, at more than $570 per share, Netflix stock is currently the 9th most expensive stock on an American exchange. Splitting NFLX would decrease the price per share and allow investors with less capital to participate in the company’s success.

Article originally appeared on InvestorPlace (04/17/2015)

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