Netflix's disc based business seen as risk for company says analyst, while original programming increases Netflix's value proposition for consumers
B. Riley & Co. analyst Eric Wold says that revenue from Netflix's disc subscribers represents the company's biggest risk going forward, as the company seeks to expands its streaming offering worldwide, and to produce more original programming.
Netflix was built on its disc renting business, and with 8 million current subscribers, disc rentals account for 64% of Netflix's predicted 2013 profits.
But with 29 million streaming subscribers, it's clear where Netflix's future lies, but with so much reliance on disc based revenue, Wold urges investors to be weary of the risks.
"While Netflix has a seemingly unbeatable lead with its domestic streaming offering, we believe investors need to focus more on the risk to the DVD segment, which is expected to generate the majority of the company’s profitability and is, in our opinion, the most at risk of competitive pressures," Wold wrote.
Netflix has been trying to fight off other subscription-VOD competitors, including Amazon's Prime Instant Streaming and the newly opened Redbox Instant by Verizon, by producing exclusive original programming, including the critically acclaimed House of Cards. A new season of the cult hit Arrested Development will also be released soon, but the recently released Hemlock Grove has received mixed feedback from reviewers.
With original shows being added to an existing library of TV shows, movies and documentaries, BTIG Research analyst Richard Greenfield believes that the value proposition for Netflix has increased over time.
"While it is far too early to call Netflix’s original programming push a success, they are trying to reach a point where consumers know that there will always be something new and interesting coming that requires a Netflix subscription, in addition to top-tier syndicated programming and a sufficient movie selection," Greenfield wrote.