The innovation and competition of Netflix

The stock of Netflix (NFLX) is one of the best performing security in 2015. However, this year (2016), NFLX has experienced set backs. This blog post describes the innovations that Netflix has brought and the challenges that Netflix is facing. 

Prior to Netflix, the primary way for people to watch video for entertainment is through TV and DVD/VHS. 

With the prevalence, Netflix leads the wave of video entertainment by providing a monthly subscription based viewing plan. A consumer can pay 9$ per month for unlimited access of the video that Netflix provides. Facing competition from Hulu, Amazon Prime and a high P/E ratio, the question we are asking is "Does Netflix has a durable competitive advantage?". 

This question can be separated into two parts, a. content, b. technology. From technology perspective, there is very little substantial differences between Amazon Prime, Hulu and Netflix. If one feature is implemented in one of them, the others will quickly adopt it. In the end, video playing is not as complicated as operating a word processor. The second is content, from what I found, Netflix is not competitive in terms of content, many well received movies or shows are not available through streaming. Netflix is striving to compensate this via producing original shows such as "House of Cards" and acquiring shows that are exclusive to Netflix. Amazon Prime is following a similar path. Although this may mitigate the content shortage problem, it is doubtful whether this is a sustainable economic model. 

Because of the traction of online streaming, the traditional video media are losing mindshare from their customers, as a result, they are reluctant to collaborate with the new comers. Instead, they like to put the their content online by themselves, for example HBO online. It seems it is not that hard to setup a video website, the differentiator of the online streaming business is the content. As a result, unless Netflix finds a creative and sustainable revenue to solve the content problem, the challenge that it is facing will persist into the forseeable future.