Target (NYSE:TGT) plans to join the video streaming bandwagon as demand surges in the U.S. The retailer’s streaming service ‘Target Ticket’ will have a catalog of 15,000 movies and TV shows and will be available on PCs, Macs, Xbox , iPhone, iPad and Android based devices over time. 
Should Netflix (NASDAQ:NFLX) be worried at all?
We don’t think so as Target’s service is more akin to Apple’s (NASDAQ:AAPL) iTunes and Wal-Mart’s (NYSE:WMT) Vudu and will allow users to rent or purchase individual movies. Netflix has flourished despite the presence of such services and its real competition lies with Amazon (NASDAQ:AMZN), Redbox (with Verizon), Dish Network’s Blockbuster and Hulu.
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Even though Netflix still has an advantage over its competitors in terms of subscriber base, content quantity and quality, device reach and brand image, the potential strength of the competitors and their intentions cannot be ignored. Amazon’s Prime service can emerge as Netflix’s biggest competitive threat, especially because of its sufficiently large subscriber base in the U.S. and presence in Europe as Lovefilm. In addition to this, its streaming library seems to be growing at a fast pace and seems sufficient enough to attract customers. Amazon’s growing subscriber base and streaming catalog cannot be ignored by Netflix and presents the highest competitive threat in the U.S. streaming market.
Amazon had over 22,000 titles in its streaming library in August 2012, which represented 70% growth in 2012 alone.  By the end of June 2013, the number of streaming titles increased to 41,000 representing an annualized growth of roughly 100%. 
Amazon continues to strike new deals and is placing greater emphasis on kids-focused programming. The company mentioned that such programs are one of the most watched TV genres on its Prime video service. In the recent months, several analysts have attributed the decline in TV ratings of Nickelodeon to more kids watching programs on alternative platforms such as Netflix. This again reinforces the popularity of kids-focused content on the Internet. Amazon can leverage its recent deal with Viacom to add more content to its Lovefilm service in Europe. This is another market where Netflix is trying to expand. Given that Lovefilm is a known brand in the region, better content along with improved streaming quality and user interface can help Amazon grow.
Besides this, Amazon Studios, the company’s original movie and series production arm, has been working on bringing more original content to Amazon Prime’s arsenal.
Competition And Original Programming Are Pushing Content Costs Higher
Netflix’s content costs have risen substantially over the last few years due to its efforts to expand its streaming library both in the U.S. and international markets. Back in 2011, Starz was demanding as much as a ten-fold increase in payments for the renewal of its content contract with Netflix. This would have amounted to an annual payment of around $300 million compared to its original deal of close to $30 million. This is a classic example demonstrating how streaming content costs have skyrocketed in recent years as competitors are bidding up prices and media companies are realizing the value of their content.
Netflix has been adding some original and exclusive programming to its streaming library which seems to be paying off. TV series such as House of Cards, Lilyhammer and Arrested Development are drawing audience and attracting customers to sign up. Netflix has also effectively marketed these exclusive shows to maintain its subscriber momentum. It is estimated that Netflix is paying somewhere around $4 million per original episode. The company has ordered the second season of all its first season projects, which reflects the popularity of its original series among its customers. The quality of the programming is good given that Netflix’s original series were nominated for 14 Emmy awards, with most of those nominations coming from House of Cards. Next year, the company plans to premiere the second season of House of Cards, Hemlock Grove, and Orange is the New Black, and debut Sense 8 and several kids-focused original programs.
These content deals do not come cheap, which is evident from the significant jump in Netflix’s streaming content costs, overall content costs and streaming obligations over the last two years. The trend has continued in the first half of 2013 as well.
Our price estimate for Netflix stands at $170, implying a discount of about 40% to the market price.Notes:
- Target Ticket, Target’s Video Download & Rental Service, Nears Launch, TechCrunch, Aug 30 2013 [↩]
- Amazon Prime Crosses Big Milestone: More Items Are Now Shipped with Prime Free Two-Day Shipping Than with Free Super Saver Shipping, Amazon Press Release, Aug 27 201 [↩]
- CBS’s Under the Dome Now Available for Exclusive Online Subscription Streaming on Prime Instant Video, Amazon Press Release, June 28 2013 [↩]