The perils of Netflix

Netflix is sitting on top of the online video hill right now, but a host of challengers threaten to knock it off. From growing competition to bandwidth pressures to disgruntled shareholders looking for a leadership change, the path ahead holds many dangers.

From the outside, Netflix (NASDAQ: NFLX) is sitting pretty. Roughly half of all U.S. households now have a Netflix subscription, and the amount of streaming going on, according to a Cisco report, threatens to eat up the Internet, taking up 79 percent of all IP traffic by 2018. Further, the streaming video on demand provider hasn't just rebounded from its 2011 stock price dive--it has soared, with its share prices growing 91 percent since 2013, currently sitting around $425.

But there is still room for caution. Netflix isn't the only disruptor in the media and entertainment space, and the waters roiling below it could eat away at the provider's market lead.

Direct competitors Amazon and Hulu have much less of the online video audience, but both are making committed investments in original content and licensed content in bids to draw subscribers away from Netflix. Amazon's recent deal with HBO for its older series, for example, "came out of left field," according to Michael Nathanson of MoffettNathanson in an April blog post, who said the deal could ultimately bring HBO $300 million.

Ad-supported provider YouTube is the biggest elephant in the room in terms of audience, and this week launched an ISP speed tracking service of its own that it clearly hopes will replace Netflix's Speed Index as the industry's broadband quality yardstick.

Live streaming is grabbing plenty of viewers too, and while Twitch, MLB Live, WWE Network and similar providers are smaller, the massive growth in the popularity of live events online could put a big dent into Netflix's viewing stats.

That doesn't mean Netflix is taking a cautious tack.

This week, Netflix took on another one of the big dawgs of the ISP world with its buffering message campaign that appeared to target Verizon's FiOS network. Subscribers saw a message on their screen whenever their video buffered that suggested the carrier's network was to blame for the poor-quality experience. Ultimately, Netflix had to back down when Verizon delivered a cease-and-desist letter--but it did so grudgingly, saying in a corporate blog post that the "small-scale" test would end June 16 and that the provider would evaluate continuing its campaign for "network transparency" in the future.

It's not surprising that Netflix is continuing to be aggressive about the way its signal is delivered by ISPs in the last mile of the network. Despite signing a peering agreement with Comcast (NASDAQ: CMCSA) in February to get better bandwidth over the cable provider's broadband network, Netflix maintained its criticism of Comcast, implying that the MSO gave them no choice but to broker the fast-lane deal.

Meantime, a few of its shareholders continue to be unhappy with the leadership structure at Netflix. At its annual shareholders' meeting, two major investors pushed for the chairman and CEO position to be split into two separate positions, with Reed Hastings remaining in the CEO spot.

The resolution was defeated with 53 percent of shareholders voting against it, but it begs the question as to why, in a year of such huge gains in share prices, there would be a lack of confidence in Hastings' leadership.

According to Scott M. Stringer, New York City's comptroller and one of those who pushed for the vote, it's not about his leadership capabilities, but rather his influence over the board.

"Reed Hastings may be a terrific CEO, but he shouldn't also chair the board to which he answers," Stringer told The Wall Street Journal.

Regardless of Stringer's feelings, Hastings so far appears to have investors' best interests in mind.

But the online video landscape is far from serene. As Dish Network (NASDAQ: DISH) inches forward with a possible over-the-top offering later this year, other pay-TV providers are certainly looking for ways to retain their subscribers and keep them from running off to Netflix's all-you-can-stream buffet.

Market analysts are keeping a close eye on the provider, too. Analyst Benjamin Graham, for example, likes Netflix's balanced long-term debt ratio ($900 million vs. net assets of $1.32 billion). But the company's price-earnings and price/book ratios are worrisome, according to his calculations, making the company's stocks less financially secure and less defensive. And Motley Fool is even more skeptical, taking issue with Netflix's ability to sustain its profit margin and its free cash flow, which stands at -37 cents per share.

Hopefully, Reed Hastings and his senior leadership--content guru Ted Sarandos and CFO David Wells--are building in safeguards to survive market headwinds and possible sideswipes from a variety of market upstarts. --Sam

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