After posting another sizzling quarter, Netflix seems poised for continued growth. But one analyst believes the company should watch out for the competition.
"We think that new services from Hulu, Amazon, Google TV and Apple, as well as the potential launch of a Dish Network/Blockbuster streaming service, each have the potential to create a bidding war for a relatively small amount of available content, and have even greater potential to create pricing pressure on subscriptions," Wedbush analyst Michael Pachter wrote to investors in a research note today.
Pachter is concerned that, in an attempt to catch up to Netflix, the company's competitors will be too willing to give content providers boatloads of cash for their programming. He believes that "one or more irrational competitors could bid up the revenue share paid for content to the 60 percent paid by cable VOD providers, or to the 70 percent currently paid by Apple."
Netflix currently charges customers $8 per month for a streaming-only option, and more for those who have a streaming-and-DVD-rental plan. If content prices go up due to competitive influence, Pachter believes Netflix will have no choice but "to pay more in order to avoid seeing its churn grow." That, he says, could put a damper on its earnings.
So far, Netflix's dominant position in the streaming market is helping it achieve impressive financial performance. The company announced its first quarter earnings yesterday, posting a $60 million profit on $719 million in revenue. It now has 23.6 million subscribers.
Netflix might not only need to worry about trigger-happy competitors. CNET's Greg Sandoval said yesterday that his film industry sources told him that they are currently in the process of determining how much they should charge for their content. And once they figure that out, they could require Netflix to pay them more than it currently does.
Such demands wouldn't be anything new. HBO said earlier this year that in order for Netflix to afford its content, the rental company would need to charge customers at least $20 per month for its streaming service.
For its part, Netflix seems prepared to pay more for its content. Last year, the company told CNET that if it's "successful, you'll see lower DVD expense and higher streaming expense."
However, it doesn't want to overpay for content either. In response to HBO's claims, Netflix told The Hollywood Reporter earlier this year that it's willing to "figure out a deal [with HBO] that makes sense. If we don't, then the service doesn't have everything, and that's OK too."
Plus, Netflix is thinking outside the box. Earlier this year, the company outbid HBO to acquire its first original program, "House of Cards," starring Kevin Spacey. The show is expected to air next year. Netflix has already committed to 26 episodes.