To maintain its popularity among kids, Netflix Inc. (NFLX) has added Sony Corp.’s (SNE) PlayStation 3 (PS3) to the list of devices to stream TV shows and films for the “Just for Kids” category. Netflix’s streaming services are already available on Nintendo’s Wii game console.
“Just for Kids”, as the name implies, is targeted at children aged 12 and under. Netflix has recognized that kids are among the keenest viewers of TV shows and films. This was evident from the fact that since its release in August 2011, “Just for Kids” has accounted for more than 1 billion hours of viewing.
Children now have direct access to their favorite programs, such as “Bob The Builder,” “Thomas the Tank Engine,” “Backyardigans,” “Caillou,” “Curious George,” “Power Rangers” and “Arthur” streamed by Netflix in the kids category.
Netflix expects to reach out to a larger section of its targeted audience through the addition of the PS3 platform. This move will enable Netflix to increase its popularity, as the streaming of movies and shows through gaming consoles have become a rage among youngsters. Netflix expects to add other devices like Microsoft Corp.‘s (MSFT) Xbox360 in the future.
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Netflix has been entering into licensing agreements with several big Hollywood production houses to bolster its content library. Moreover, to make its streaming services distinguishable from other service providers, the company has bought the exclusive rights to stream some original series as well.
Netflix’s improving content and international expansion are noteworthy. Despite the higher costs, we believe that Netflix will probably see sales strengthening, as subscribers take note of the improving portfolio. This would ultimately enable the company to build a position for itself over the long term.
Additionally, Netflix’s international expansion is a solid strategy, as the company would be able to enjoy a first-mover advantage in many nascent markets. It would also be able to offset market share losses and price competition in the domestic market with revenues from abroad.
However, we believe that increasing costs related to licensing and renewal fees and higher capital expenditure due to international expansion can hurt earnings in the near term. Additionally, Netflix’s future growth and strategy is entirely based on the online streaming business, as its DVD rental business continues to witness subscriber losses. We believe that the streaming market is overcrowded with technology stalwarts like Amazon.com Inc. (AMZN) and Verizon Communications Inc. (VZ) among others, which might hurt Netflix’s margins going forward.
We have a Neutral recommendation on Netflix over the long term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold rating in the short term.
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