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July 20, 2010
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A leading provider of online movie rental services, Netflix Inc. (NFLX) is expanding its movie subscription services over the Internet to Canada. The Canadian subscribers will be able to access this service by late 2010. Canada will be the first country outside the United States to receive Netflix services.
Netflix is offering unlimited movies and TV episodes, streamed instantly to television sets and personal computers of Canadian customers for a meager monthly fee (which was not disclosed). The service will be initially available in English language only. Netflix plans to offer the service in French language also in the coming months.
This highlights the company’s strategy of focusing on Internet streaming as Netflix continues to upgrade its digital delivery, thereby broadening its subscriber base. However, Netflix’s another popular service through which DVD’S are delivered via e-mail will not be available for the Canadian subscribers.
Netflix has more than 14 million subscribers who pay a monthly charge of $9.00 to $17.00 per month in the U.S. for unlimited DVDs by mail and films streamed over the Internet. Netflix has gained massive popularity from its availability on the Apple Inc.’s (AAPL) iPad.
Recently, the company has also started streaming videos through Nintendo's Wii video game console. This will likely boost Netflix's subscriber base as approximately 24 million Wii owners in the U.S. can access Netflix’s services.
Moreover, Netflix recently signed an agreement with Relativity Media, through which it bought the rights of some of the most popular Relativity movies. More than 10 movies solely produced by Relativity are scheduled to release over the next 12 months and will be available online exclusively for Netflix subscribers in 2011. These partnerships will provide a long-term boost to the company’s earnings.
In early 2010, Netflix management announced their intention of expanding its services globally. We believe Canadian launch is the first step toward that goal. We expect Netflix to enter the European market in the longer term, which will improve its competitiveness going forward.
Netflix continues to face stiff competition from Blockbuster Inc. (BBI) and Movie gallery Inc. (MVGRQ.PK). Netflix also experiences competitive threats from Red Box, the kiosk company owned by Coinstar (CSTR) that rents DVDs for $1.00 per night.
One of its notable competitors, Hulu Plus, launched preview services recently with an emphasis on current and library broadcast television by adding new movies fresh from the theaters and DVDs. Another competitor, Epix, with its mix of linear TV, VOD and online, is rolling out across major cable operators.
However, we are of the opinion that Netflix’s focus on improving its subscriber base by offering its services through high speed Internet and an upgraded content delivery through the Relativity agreement will increase its profitability going forward.
Moreover, weak results from one of its major competitor Blockbuster may provide Netflix a chance to grab significant market share in the near term.
We therefore have an Outperform rating on Netflix on a long-term basis (for the next 6 to 12 months). Netflix has a Zacks rank of 2, which implies a short-term Outperform rating (for the next 1-3 months).
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