Someday, online streaming could be very important to Netflix’s (NFLX) business. But that’s not in the immediate future. And as the digital movie rental business develops, Netflix will likely compete more with cable companies like Comcast — and less with online video upstarts like YouTube.
Netflix shares, which have been shooting through the roof since last November, closed down 6% Tuesday — dropping as much as 9.7% — while the Dow and Nasdaq closed up 2%. Why the sudden drop? In part because of a negative report Tuesday morning from a Wall Street analyst.
Lazard Capital’s Barton Crockett launched coverage with a SELL rating and a $34 price target, according to a summary by Barron’s. One reason: Crockett thinks Netflix’s standing in the streaming movie market “will be meaningfully eroded in coming months” by YouTube and Hulu.
Crockett — at least from the summary on Barron’s — seems to be warning investors about the wrong rivals. When digital delivery matters in a few years, instead of worrying about YouTube and Hulu, Netflix will need to worry more about cable companies like Comcast, Time Warner Cable, Verizon, and AT&T. Why? Because while Google’s YouTube is a popular Web video site for goofy clips, and it’s starting to make deals to put feature films on its site, it is not going to be a huge movie site any time soon. Why not?
First, because it does not have any compelling content on it. Have you seen the full-length movies and TV shows on YouTube? They are the kind of titles you’d buy for $3.99 at Walgreen’s. And that’s not likely to change soon. Movie studios don’t get much money from Internet ads, and they still get a lot of money from DVDs, so they’re not in a hurry to put anything great online for free.
And second, because people still want to watch feature films on their big, flat-panel TVs, not their laptops. YouTube and Hulu — and, indeed, Netflix — require people to buy a new gadget to watch movies on their TVs. That’s one of a few important areas where cable has an edge.
- Cable companies already have digital set-top boxes in tens of millions of living rooms, where people want to watch movies.
- Cable companies own their own networks, fine-tuned for video — while Netflix, YouTube, and Hulu ride over the public Internet, which cable companies control access to — and want to make more expensive.
- And cable companies already have long-standing, lucrative deals with movie studios, which they can leverage to get the best content, availability dates, etc.
Anything’s possible, so maybe YouTube will someday offer a $20 plastic thing that hooks into the back of your TV, connects to a free Google WiMax network, and can stream free, ad-supported, first-run movies to your TV set.
But the more likely future is that cable companies will dominate digital movie delivery, with companies like Netflix, Amazon, Apple, and Microsoft fighting for scraps, and YouTube and Hulu still mostly PC-based services.
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