Competition, Programming Costs Still Hurdles for Netflix Long-Term, Analysts Say

Netflix’s stock price has continued to ride the Wall St. euphoria from last week over its better-than-expected earnings on a subscription upturn, and now all eyes are on its first major original TV series, which launches Friday. Netflix stock jumped $43.60 to $146.86 last week in reaction to its earnings report, and closed Wednesday at $167.78, a level it hadn’t attained since Sept. 11, 2011, around the time that its pricing and subscription overhaul angered subscribers and sent many fleeing from the service.

Richard Greenfield, analyst with BTIG, said Netflix’s original content initiative is critical to the company’s viability for a number of reasons including the need to define the brand. Successful original programming “should reduce streaming churn as consumers will want to associate themselves with a brand that has greater meaning,” Greenfield said in a blog post, citing series including The Sopranos, Sex and the City and Boardwalk Empire that have defined HBO. If Netflix is successful with original programming, that will reduce dependence on exclusive third-party content that’s “escalating as competition builds,” Greenfield said. Success with its original programming “should help Netflix better manage/leverage its content spending,” allowing the company to abandon less-lucrative content it used to build its library, he said. “Is anyone really watching The Wonder Years on Netflix?” he asked.

Viewers and critics will ultimately be the judges of Netflix’s original programming, but what Netflix has that HBO and other linear cable channels can’t offer is a full season of programming all at once. According to the February issue of Vanity Fair, Netflix’s strategy to offer all 13 House of Cards episodes on Feb. 1 “may gut some media conglomerates along the way and could prove too costly for even a cash-rich company like Netflix to sustain, but one thing is certain: It will make a lot of viewers -- bingeing on brand-new shows made by the hottest writers, directors, and producers -- deliriously happy."

In addition to House of Cards, starring Kevin Spacey, which Netflix won by outmaneuvering HBO, according to Vanity Fair, Netflix original programming will include Orange is the New Black by Weeds creator Jenji Kohan; Hemlock Grove; season four of Arrested Development; and season two of Lilyhammer, Netflix’s first foray into original programming.

But top shelf content comes at a cost, analysts note, with some estimating Netflix’s content spend at $1 billion. International expansion offers subscriber growth potential, but there’s also increasing competition in the streaming world from Amazon Prime, Xbox, Redbox Instant by Verizon and Comcast Infinity that could erode Netflix’s market share, analysts said.

Wedbush analyst Michael Pachter maintained an “underperform” rating on Netflix Tuesday, following Netflix’s announcement of a $400 million offering of senior notes due in 2021 with $225 million of proceeds used to redeem $200 million of outstanding notes due in 2017. Additional capital will provide some “breathing room,” Pachter said, but “lack of free cash flow” and additional debt “makes Netflix a risky investment.” The latest round of funding “reflects the continuing cost escalation of its streaming agreements,” Pachter said.