After last fall’s shareholder revolt, Netflix (NSDQ: NFLX) recovered somewhat in December and January. But that momentum has slowed this month. The company’s stock price, which had rebounded to $129.5 per share as of Feb. 6, has declined nearly 16 percent from that point through Monday, when investment bank Raymond James downgraded Netflix stock to “underperform.” The sagging stock price hints at some key challenges ahead for the company, from fending off rival services to figuring out how to restock its content vaults.
Not coincidentally, Feb. 6 was also the day Redbox and Verizon announced a new venture that would offer Netflix new competition in the realm of streaming video. And since then, Comcast (NSDQ: CMCSA) has also come out of the woodwork to say its cable service will soon offer a subscription streaming product.
But emerging rivals are only part of the story. Netflix is facing this new competition just as it is about to make another crucial transition. In short, a bunch of big-name theatrical titles are about to leave Netflix’s streaming service and the replacements will take time to trickle in.
On Wednesday, the company’s much publicized breakup with pay-cable channel Starz will officially take place. With that, some of the biggest hits on Netflix’s streaming service will no longer be available for instant viewing, including such top recent Disney (NYSE: DIS) titles as Tangled, Toy Story 3, Tron: Legacy, Gnomeo and Juliet and Secretariat. By Netflix’s own count, 15 Disney titles in their first pay TV window will no longer be available, as will an extensive collection movies in Starz’s Encore catalog — a library that includes such perennials as The English Patient, Apocalypto and Scarface.
From its deal last year with pay TV service Epix to more direct content agreements with DreamWorks Animation and The Weinstein Company, Netflix has moved quickly to fill the film void. And with the Los Gatos-based company reportedly close to signing a distribution deal with Spanish-language powerhouse Univision, Netflix is building a powerful TV content war chest that even rivals Hulu Plus.
But it will take time for those deals to bear fruit. Titles from the DreamWorks Animation agreement, for example, won’t be available until 2013, meaning top-grossing kiddie movies like Kung Fu Panda 2 and Puss In Boots won’t be around to fill the void left by the Disney animation titles anytime soon. And while the Weinstein agreement brought Sunday night’s big Oscar winner to Netflix, The Artist won’t be available on the service until its pay TV window hits later this year.
Through its Epix deal, Paramount (NYSE: VIA) hits from 2011 are coming to Netflix — a bounty that will include Transformers: Dark of the Moon, Super 8, Captain America: The First Avenger, Rango, The Adventures of Tin Tin and Hugo. And through another agreement with mini-major Relativity Media, Netflix will get access to another title, action film Immortals, that grossed more than $200 million globally.
But it’s unclear when any of these movies will become available to Netflix streaming subscribers. Johnny Depp-voiced animated film Rango, for example, debuted theatrically one year ago this week and is available to Epix subscribers but not Netflix streaming customers.
The star-power issue becomes tricky for Netflix, as it looks to grow its global base of subscribers paying $7.99 for streaming fast enough to offset declines in a DVD operation it looks intent on abandoning. Having less big-name box office hits in its library would seem to work against that agenda. Raymond James, for one, believes that while Netflix will maintain a powerful enough catalog going forward to keep a leadership position over rivals like Amazon (NSDQ: AMZN) and Verizon/Redbox, it’s streaming business won’t be able to grow fast enough to appease investors.
“We believe investors continue to overlook the significant profit differences between the high margin but mature DVD business and higher growth but low margin streaming business,” Raymond James said in its investor note Monday. “As such, we believe it is appropriate to use a sum-of-parts valuation in analyzing Netflix.”