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Netflix Inc. (NFLX) Core Migration Should Give Pause

Netflix, Inc. (NASDAQ:NFLX)

Netflix, Inc. is a very different company than what it was a few months ago. It has undergone a fundamental change by moving away from its core competence of being a content distributor.

Netflix inc (NFLX)

Overseas expansion will fuel growth in the next few quarters. But the recent Emmy snub – the only major award was for Uzo Aruba of Orange is the New Black – has reminded investors that a content creator is totally different from a content distributor, and Netflix is just not among the best at the former.

Netflix is Down But Not Out

Netflix, Inc.  is now down over 25 percent from its August high, putting it “officially” into bear market territory. That isn’t unexpected considering the uncertainty surrounding the markets.

When the markets rebound, so will the stock. But what is more worrying from an investor stand-point is the increased risk associated with the streaming firm moving away from its core competency. Frankly, the management wasn’t left with much choice. It was fast losing pricing power over redistribution after Amazon.com, Inc.  stepped onto the scene.

Netflix, Inc. is a once in a generation company. It broke all barriers of technology to emerge as a mammoth content distributor. And in the process, forever changed the dynamics of the media business. It fended off some very powerful rivals, and sometimes even made them look foolish. But times are changing, and Netflix is now relying more and more on original content at the cost of proven shows from others.

Will Original Content Pay-Off?

Netflix, Inc. recently announced that thousands of movies will be taken off from its U.S. platform after it did not renew a deal with Epix. Netflix clarified that the deal wasn’t providing any competitive advantage given that so many other platforms already have them. That may not necessarily be true. Hulu, for one, said that “subscribers have been asking us for more, and more recent, big movies.”

Currently, close to 10 percent of Netflix’s content is either licensed or created by the firm. Reed Hastings plans to increase that to 50 percent. Till now, NFLX has done a fair job with its original content. But that hasn’t stopped major shareholders from asking if the company’s story is as compelling now than when it was a pure technology disruptor through distribution.

Apple Could Make Things Tougher

There is one more serious new threat. Apple Inc.  has stepped into the fray with Apple TV. And Global Equities Research’s Trip Chowdhry thinks the Apple TV platform “provides strong indication” that it will launch its own software development kit and app store. And therein lays the headache for Netflix. Chowdhry argues that in this new Apple ecosystem, Netflix would be confined to being just another app – a “second-class citizen.”

Of course, it’s too early to pass a verdict. But we must keep our eyes fixed on the scene. Chances are that Netflix, Inc. will smoothly make the transition. At least, history suggests that. Every time the firm faced an existential crisis, not only did it overcome the threat, but also came back bigger and stronger.

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