Netflix (NASDAQ:NFLX), the online movie rental company, has been expanding its streaming capabilities to different gadgets that customers typically use at home. Netflix’s can stream to computers, laptops, set top boxes (Roku), major gaming consoles like Xbox, PlayStation and now Nintendo’s Wii.
Netflix recently announced that it will be shipping free discs to enable streaming to TV via Wii consoles for its subscribers. Wii users that do not have a Netflix subscription will need to subscribe to at least the $8.99 per month plan in order to enjoy the streaming service.
Below we discuss how expansion of streaming to different gadgets and platforms will help Netflix to save costs, increase margins and win new subscribers.
Expansion of streaming will reduce costs for Netflix and improve convenience for customers
As Netflix makes it increasingly easier for subscribers to watch movies instantly, more subscribers are likely to watch a film streamed through Netflix rather than delivered as a DVD due to the convenience of streaming. This will lower content delivery costs and improve overall margins for Netflix.
We estimate that it costs Netflix about 6 cents to deliver a movie online compared to about 65 cents for offline delivery (DVD sent by mail). Below you can see how Netflix’s stock can be affected if the number of DVDs shipped per subscriber declined faster than we anticipate. The DVD shipment decline boosts Netflix’s stock by lowering the company’s costs and making it more profitable.
However, the success of streaming will also depend on Netflix’s ability to enrich its online movie catalog and bring new releases for instant streaming. Netflix has been working on this and we expect that the number of new release films available by streaming will increase over the long-run.
Game console owners a new potential market for Netflix
Netflix now has the capability to stream movies to TVs via Xbox, PlayStation and Wii gaming consoles. The combined customer base for these consoles stands at an estimated 56 million in the US with Wii accounting for little less than 50% of this base. This is much larger than Netflix’s current subscriber base of 12 million.
Although a very low fraction of the gaming console customer base currently subscribes to Netflix, we believe that Netflix has created a unique opportunity for itself that will make it easier to tap into this potential customer base.
Gaming console customers save money with Netflix by not purchasing a separate set top box
By bringing Netflix film service to the home through gaming consoles, Netflix has made the purchase of a separate internet-to-TV set top box unnecessary for many console customers. This makes Netflix service even more attractive and can potentially act as incentive for console users to subscribe to Netflix’s services with the only associated cost being a monthly subscription fee of $8.99 per month.
If you believe that Netflix’s strategy will lead to a bigger increase in Netflix subscribers than we forecast, you can modify our forecast below to see how such an increase can impact Netflix’s stock price.
For additional analysis and forecasts, here is our complete model for Netflix’s stock
