Owners of Netflix stock are feeling some pain after shares dropped more than 25 percent in premarket trading on Oct. 16. Netflix reported poor third quarter earnings, and to top that off they claimed they obtained significantly fewer new subscribers than expected. None the less, those who are long on Netflix need to seriously reconsider that option.
HBO just announced that it will be offering HBO GO, its online streaming service, without a cable/satellite subscription to HBO. This news and poor earnings slammed Netflix in afterhours trading. The poor earnings and fewer subscribers is bearish enough to cause a stir, however the real news here is HBO. HBO has some of the most popular shows on TV, most notably, “Game of Thrones.” “Game of Thrones” also happens to be the most illegally downloaded and shared TV show ever – and there is a reason for that. No one wants to pay for HBO to watch only one show. This is where HBO GO changes the game. Now subscribers can not only watch their favorite show instantly, they can choose from all of HBO’s shows from the past and can view a much larger selection of movies that are actually worth watching.
Netflix does have a much wider array of content, however most of it is pure garbage. The question remains – what’s the price? That is still to be determined, however we can speculate on what makes sense. While HBO and Netflix certainly have its differences, it would be foolish for HBO to not competitively price their service against Netflix. If HBO is around $10 – $15 a month, Netflix could be in for a rude awakening. It wouldn’t make much sense for HBO to make the price much higher as the entire point of HBO GO is to get rid of the expensive cable bill.
While Netflix certainly has its own shows worth watching, such as “House of Cards” and “Orange is the New Black,” can it find a way to set itself apart from the competition? Investors seem worried that the answer to that question is no. Those who did not sell on Oct.16. and are wary of simply eating the loss need to pay attention to a few things. The first and most important is the price point of HBO GO. The majority of the HBO GO subscribers will probably be coming from those who either illegally downloaded HBO’s content or who used friends’ accounts to watch HBO GO. If the price remains high, HBO will not see the revenue it needs to compete with Netflix. On the other hand, if HBO GO is priced competitively with Netflix it is probably time to sell.
While Netflix does have a great business model, competition is growing and it is showing. Another item to keep an eye out for is news regarding subscribers and growth. Netflix has had a euphoric four years and it seems tough for it to maintain that growth especially with new competition.