Netflix- One price point away from a failed business model

Netflix is one price point away from a failed business model.  The price point I am referring to has nothing to do with the recently announced price increase by Netflix.  I am referring to the competition i.e. the cable companies.

All the cable companies need to do to destroy Netflix is start offering unlimited pay per view movies and TV shows for a flat monthly fee slightly lower than Netflix.  They could even wait to show the newest releases 7 days before allowing the unlimited package group from seeing them, thus minimizing the impact on the pay per view new movie stream to the operators.

The benefits to the cable operators and users

 

• Less IP traffic associated today with their customers’ use of Netflix over the cable operator’s internet network.  They would probably need to spend less capital to enhance their networks since a bulk of the usage today over the internet is video.

• Increased revenue for cable operators because the change would offer them a new revenue stream.  I for one would buy it as a type of TV/Movie insurance from charges my kids run up for pay per view now.  Some months I spend $0 on pay per view but other months it can be as high as $20 even though we have Netflix.  If I did not have to worry about individual charges for movies I would pay say $10 flat.  It would be cheap insurance to protect me from large pay per view bills.

• No need to wait 28 days for new releases like you do for Netflix.  Obviously the movie studios would want to get a slice of the pay per view revenue.    The delay could be negotiated.  The movie studios like cable operators better than Netflix because they could at least get paid for each time a movie is viewed compared to Netflix use of DVD’s (downloads by Netflix would probably be treated the same).

• No need for additional equipment or accounts.  Consumers would not need to buy other devices like DVD players, XBoxes, or TV’s equipped with Netflix to get the same service.  The reason Netflix does this in the first place is because they see the hole in their business model and they are trying to plug it by having Netflix on all devices known to man.   They are in an absolute panic hoping the cable companies do not catch on.

• Cable companies control the customer.  Like the battle between AOL dial up and broadband.  AOL lost out once customers switched operators when the cost of broadband came down in the early 2000’s. People watch movies not Netflix.  It is the content not the company bringing it to them.  The cable operators will win out because Netflix becomes irrelevant.  Why do you need them if you could have the same thing from your cable operator?  Plus there is no second bill to pay.

Forecast

Within 18 months of 3 of the top 5 cable operators and Verizon offering this price point, Netflix will sustain negative growth and a rapidly declining share price.  Netflix, as of September 1^st, 2011, trades at $233.27 down from almost $305 as a 52 week high.  Start your short when the cable operators start offering a flat rated product through mass advertisements.  Within 18 months the stock will lose 95% of its value.  I predict the stock will trade between $5 to $10 per share once they are finally taken over by private equity or a company like Newscorp.  Do not do this short until you see the cable operators make a change.  That is the trigger for the 18 month decline to irrelevance.

Full Disclosure

I am a Netflix customer.  As of September 1, 2011 I do not own any shares (long or short) in Netflix.