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Verizon Communications Inc. (VZ)’s Go90 Should Worry Netflix (NFLX)

Netflix Inc (NASDAQ:NFLX)

Verizon Communications Inc. ’s newest initiative Go90 could be a source of worry for streaming giant Netflix, Inc. . The free mobile app will live stream NFL games and music concerts, besides traditional TV programs. The importance of live sports in general and NFL games in particular, should not be lost on prospective investors. These two – live sports and concerts – are among the most hotly sought after video content today.

Verizon Wireless

Verizon Could Dent Netflix’s Appeal

At a time when streaming has become increasingly commoditized, live content will give Verizon a leg up on Netflix, Inc. and Amazon’s services. Since both of them lack live programs, they may have to rethink their strategy to stay competitive.

The emphasis on live streaming will open up Verizon Communications Inc. to a new source of long term revenue. Data access is the future of telecom. And VZ is positioning itself to grab a big chunk of that pie.

Verizon will be in the driver’s seat. Since it is the link between content creators and consumers, it need not worry about creating content or demand for it. Additionally, given the huge size of its network, content creators like NFL are more than likely to pick VZ as their distribution partner. The downside in all this is pretty low. Verizon does not incur the large costs associated with content and demand creation. This is something that will likely affect Netflix, Inc. ’s balance sheet as it shifts to original programming.

In short, Verizon’s Go90 strategy should keep the firm’s Return on Invested Capital (ROIC) comparatively higher for the medium term.

Industry Leading ROIC

Speaking of ROIC, Verizon Communications Inc. has been super efficient in managing the capital it invests. Its ROIC has jumped from 5 percent at the end of 2006 to the current 8 percent. Every year since 2008, VZ has been able to generate positive economic earnings. As a result, shareholders are happy.

Verizon is among the largest telecom service providers in the country. AT&T, Sprint, T-Mobile – all big names. But despite the intense competition, VZ remains the strongest stock because it has the highest ROIC. In fact, its ROIC is twice as high as closest rival AT&T. This gives VZ significant pricing power to withstand price competition.

Another major advantage is the strength of Verizon Communications Inc. ’s network. PC Mag recently rated Verizon Wireless as the fastest mobile network in the U.S. Consumers doesn’t hesitate to pay for a fast connection. This is exhibited by VZ’s sector leading 133 million subscriber base. Not resting on its laurels, Verizon recently announced the trial of 5G network. With data speeds up to 50 times faster than the current 4G network, expect VZ’s growth momentum to pick steam, once that rolls out.

 

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