Tuesday's big news relevant to Netflix (NFLX) was that Comcast (CMCSA) was launching its own streaming service. It's going to be free to premium subscribers and possibly available to non-Comcast subscribers (but there were few details on this).
The news was all that was needed to take the newly resurgent Netflix stock down a peg or two. After trading close to $125 on Tuesday, the shares closed Wednesday at $112.40.
On news like this, the Netflix "Chicken Littles" come out, saying "OK, now the big boys are entering the space." The critics expect that the cable companies have more money and ties to content. They assume that Amazon (AMZN) has more resources to throw at buying content. They say that Netflix has signed up to capital obligations for content that they might not have the cash to fund in the future. They say that streaming offers no barriers to entry with low switching costs.
Yesterday, on CNBC's "Fast Money," Wedbush analyst Michael Pachter said that he pulled his $45 price target for Netflix "out of thin air," but he was sure that the stock was worth much less than where it is currently trading.
Yet, here is the biggest advantage that Netflix has against all these well-heeled competitors: The company currently has lots of subscribers and the others don't. At the end of last quarter, Netflix had nearly 22 million streaming customers and nearly 25 million total customers.
Pachter worried yesterday aloud: "What if Comcast attracts 20% of the 20% of Netflix customers who are also Comcast subscribers? That's a million subscribers."
Certainly dropping a million subscribers next quarter could have a big impact on the stock -- as happened at the end of last year in response to Netflix management's puzzling decisions. Yet, part of the reason why Netflix has rebounded is that customers have continued to sign up despite the whole price-hike controversy.
Netflix has a big brand name and 25 million subscribers is nothing to sniff at. Not a lot of subscription services get to that level. As a reference point, HBO has 27 million subscribers.
We don't know exactly how many subscribers Amazon Prime has for its streaming service, but it likely has far fewer.
That's why, for all those who continue to want to write the obituary for Netflix, it continues to be a very attractive acquisition target. If Amazon really wants to play in the digital content space, I still think it would make sense for the company to buy out Reed Hastings and his team at Netflix than to try to compete with him.
At a current market cap of $6 billion, an acquisition wouldn't be cheap, but you are immediately getting an installed base of customers with a solid base in the U.S. and a lot of growth potential internationally.
Les Moonves, head of CBS (CBS), said last year that people misunderstood how powerful the number of subscribers you have can be when you come to the table to negotiate future content agreements. Your costs per subscriber keep dropping over time as you get more and more muscle in your negotiations. So there's a major barrier to entry.
I expect the impact of these new Comcast-type streaming services to continue to have a minimal effect on Netflix's growth.