Netflix, Inc. shares fell on Monday’s market in line with a broad fall across Wall Street. Plunging oil prices appear to be the major culprit, at least according to an analysis by Reuters. There are other, more specific reasons for those holding Netflix stock to be worried, however. The firm is being shaken after a prolonged rally, and sleeping giant Apple Inc. may be about to awaken.
Apple is, if some reasonably well founded rumors are believed, working on a video streaming service that it wants to pair with its Apple TV set top box. The launch of that service is going to produce at least some volatility for Netflix stock as traders wonder whether or not Cupertino is going to be real competition in video streaming. Some analysts reckon that Apple, by virtue of its vast size and brand power, has already won.
Netflix, Inc. can’t compete with Apple
Frederick Steier, an event-driven, contrarian trader who writes on Seeking Alpha, reckons that Netflix will have its value undermined by Apple Inc. in the months and years to come. In his view it’s a matter of when, rather than if, Tim Cook will take Reed Hastings’ breakfast.
Steier says that the biggest problem for Netflix, Inc. is going to be the sheer amount of cash that Apple can get its hands on. If the Cupertino firm wants to destroy Netflix it can simply “flood audiences with original content,” and “make a one year deal for exclusive access to the best content ever made.”
In his view streaming services only do well because of the quality of content they bring to the table. Netflix stock has risen as a result of the huge splash the firm has made in mainstream media. Apple might be able to erode that by driving up the price of third party content, while at the same time outproducing Netflix with its own shows.
The logic here isn’t exactly concrete. Though it seems fairly clear that Apple will start its own streaming service, it’s not all that clear that the firm is going to get into content. A report from Variety on August 31 suggested that was indeed the plan, but, as with all Apple rumors, that should be taken with a pinch of salt.
At the same time, Apple’s entry into the market could very well increase the price of third party content, it’s not likely that the firm will be able to go exclusive with multiple partners. Netflix has had lots of trouble getting those kinds of deals because content owners don’t want to reduce their own power in the market.
Still, Steier reckons that “if Apple wanted to, it could literally choke off Netflix’s access to content.” Netflix stock will suffer if that’s the direction that the streaming market turns in the coming years, but there’s lots of reasons to think that Apple won’t be all that interested in getting rid of Netflix.
Taking a hopeful look at Netflix stock
Mr. Steier’s view is that of one man, and it’s hardly representative of the way traders in general see Netflix stock. Rumors of an Apple streaming service have been around for almost all of 2015, but in the last twelve months Netflix stock has more than doubled. Today’s small retreat doesn’t put much of a dent in the gains made by shares so far this year.
The Apple streaming service hasn’t exactly been a home run so far. It turns out that talks to secure content on the scale that Apple is attempting aren’t all that easy, and it seems those talks have severely slowed the roll out of the streaming service. Initial rumors suggested that Apple would show its streaming platform to the world at WWDC in June, but it failed to appear.
Around that time a few Wall Street research houses opined on the future of Netflix stock in a world where Apple is active. In a report published last April Morgan Stanley said that Netflix will be able to grow impressive in such a world.
Morgan Stanley said that any saving that Apple gives to customers over cable will free up cash that they can then spend on Netflix, while at the same time the rise of an Apple streaming service would speed adoption of set top boxes and increase the direct addressable market for Netflix, Inc. . The firm put a price target of $535, or $76.42 in post-split terms, on Netflix stock, a level it has easily surpassed in the months since.
Netflix will have to compete with Apple Inc.
The hopeful view on Netflix doesn’t mitigate the reality. Netflix is going to have to compete with Apple in the months and years to come. Though that might be good for Netflix stock in the long run, it is likely to see a lot of added volatility as it finally has to compete with a firm toe-to-toe.
It’s been quite a while since any company could really claim to compete with Netflix. Though Amazon offers Prime, the video service is a lesser part of that whole package. Apple will draw eyes away from Netflix in the years to come, but that doesn’t mean that Tim Cook will want to destroy the value of Netflix stock.
Apple doesn’t want to take every single market from every single player. The firm may be a hard negotiator in its dealings with music labels but it hasn’t started publishing albums, even those from U2, in its fifteen years in that market. iOS is likely the most successful gaming platform out there right now, at least in terms of profitability, but Apple has sought to build the platform rather than taking the content.
The same goes for a whole lot of other businesses that Apple is involved in. The firm sells a lot of software through its App store, but it only competes with those firms in certain key areas.
For Apple Inc. it’s likely that Netflix is a content provider rather than a platform competitor. The streaming service can add a whole lot of value to the Apple TV platform, and there doesn’t seem to be a whole lot that Apple will want to take away from Reed Hastings.
The Morgan Stanley view is, however, at least as speculative as that of Mr. Steier, and it really does remain to be seen what Apple is going to do with its streaming service. As Netflix stock hits all time highs day after day, now may be the time for those holding the stock to think about the future of the streaming service, and the sleeping giant that is Apple.