Peter Kafka

Recent Posts by Peter Kafka

Netflix Says Amazon Is Gaining and HBO Is Coming

Another earnings report, another wild swing in share price for Netflix: The stock is down double digits this afternoon, even though the company’s earnings of 11 cents a share handily beat the Street’s 4 cents consensus.

The culprit for the dyspeptic reaction: The company’s Q3 domestic subscription numbers — as well as its guidance for Q4 — fell below investors’ expectations.

But if things are tough for Netflix how, they’re only going to get tougher.

The company used to have the Web home video market more or less to itself, and now it doesn’t. It’s facing competition from Amazon, Hulu and the cable companies, and is about to start fighting a joint venture between Redbox and Verizon.

That’s not a new observation, of course. But in this quarter’s letter to shareholders, Hastings spells out the strengths and weaknesses of many of his competitors, and it makes for very interesting reading. The two biggest takeaways I found on my first scan:

  • For the first time, Amazon appears to be making headway against Netflix with its digital offering.
  • Netflix doesn’t believe HBO and Time Warner executives when they say they’re not going to sell a Web-only offering. They expect to compete directly with the pay channel, via an a la carte Web offering, in the U.S.

The breakdown: Jeff Bezos and company have been building up a digital streaming service that they’ve been bundling with their Prime service for a couple years now. And for a couple years, Netflix — as well as the studios that sell Amazon their programming — has said that consumers don’t seem to be using Amazon’s service very much.

If I’m interpreting Hastings’ comments correctly, that’s changing. Here’s what Hastings said about Amazon last quarter, which echoes comments he has made for several quarters: “We have yet to see Hulu Plus or Amazon Prime gain meaningful traction relative to our viewing hours.”

But here’s Hastings today: “Our estimate is that viewing of Amazon Prime Instant Video has yet to pass that of Hulu.” Perhaps I’m misreading Hastings’ comments here, but he chooses his words pretty carefully (and I’m told he does write these things himself). And to me, there’s a real difference there — one that reads as if Bezos is coming up in Hasting’s rear-view mirror.

As far as HBO goes, no interpretation needed here. While everyone from Time Warner CEO Jeff Bewkes on down says that HBO needs to be tied to the pay cable business in the U.S., Hastings says that’s going to change: “We think it will make strategic sense eventually for HBO to go direct-to-consumer in the U.S., and become more of a competitor to Netflix; so, that is our operating assumption …”

It’s possible that Hastings is wrong here — I’m quite sure Bewkes isn’t bringing him in for confidential strategy discussions.

But if he’s right, that’s great news for the “I want ‘Game of Thrones’ and I don’t want to pay for cable” crowd. And a real serious challenge for Hastings and his shareholders.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik