Despite a stellar third quarter, particularly in the streaming area, Netflix may be in for a rough road ahead when it may be forced to pay more for content acquisition and marketing. One of the few blemishes in its Q3 financials was Netflix’s subscriber acquisition cost (SAC), which was the highest of the year at 14.5%.
Morningstar analyst Larry Witt believes that once competition from the likes of Amazon, Hulu, YouTube, Google and Apple heats up, Netflix’s head start in the streaming business will count for less and less. According to Witt:
“Netflix’s lack of a competitive advantage in digital delivery will eventually strain subscriber growth and will pressure profit margins due to higher content costs and increased marketing expenses.”
Witt believes that as more companies begin to compete with Netflix in the streaming business, it will be forced to make its prices more competitive as it fights for each new subscriber. Said Witt:
“As subscriber growth slows, we expect the decline in prices to lead to much lower revenue growth. Overall, we expect revenue growth to average 5.8% over the next 10 years, with 12% average annual growth from 2010 to 2014, followed by flat revenue from 2015 to 2019.”
Where do you put Netflix’s chances of increasing/maintaining its dominance in the streaming business, Insiders? Who will pose the greatest challenge?