As competitors like Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Hulu (NASDAQ:CMCSA) emerge, Netflix (NASDAQ:NFLX) could be looking at a lot more competition in the online streaming movie business, which could mean higher content licensing costs as studios look to get in on the action. Netflix currently has another year or two on most of its contracts, but after that could be looking at licensing costs of $1.98 billion in 2012, up from $180 million in 2010.
That’s because Netflix was able to get studios like Warner Bros. (NYSE:TWX) and MTV (NYSE:VIAB) to license big TV and film catalogues for roughly $5 million to $10 million a year back when video streaming was new and Netflix was still mostly a DVD delivery service, but now those prices are bound to increase as Netflix loses the price-setting power of being the only bidder in the market.
And if Netflix can’t keep up with the latest content, losing studio deals to its competitors, its users will move along as well. Last month, Netflix users got a feel of how competition could effect Netflix services as hundreds of Sony (NYSE:SNE) movies disappeared from Netflix’s “watch now” catalog. Netflix cited a “temporary contract issue” between Sony and Starz (NASDAQ:LCAPA), which licenses Sony’s movie catalog and, in 2008, signed a four-year deal with Netflix giving them access to all of Starz’ offerings.
According to the L.A. Times, Sony’s deal with Starz put a cap on the number of subscribers who could watch Sony content online. When that cap was reached, Sony removed the content. The same may soon happen with Starz’ catalog of Disney films. And Sony is unlikely to be the only studio threatening to pull out of contracts not lucrative enough for them. So in order to keep its content competitive, Netflix will have to shell out more money to outbid its competitors.
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Netflix brought in $2.2 billion in sales last year for a profit of $161 million, with $342 million in cash on hand at the end of last quarter. However, Amazon had nearly $7 billion in cash, and Google has $37 billion, allowing both companies the ability to outbid Netflix if they should seek to expand their video offerings. Hulu’s owners — Walt Disney Co. (NYSE:DIS), NBCUniversal (NASDAQ:CMCSA), and Fox Entertainment Group (NASDAQ:NWSA) — are currently looking to sell the site, which could have the potential to do battle with Netflix, as evidence by potential buyers like Microsoft (NASDAQ:MSFT), Yahoo! (NASDAQ:YHOO), AT&T (NYSE:T), Verizon (NYSE:VZ), Google, and Amazon.
But as of yet, no real competition has emerged. Netflix’s global subscriber base grew 70% over the last year, up to 23.6 million users. “Netflix is the first and the biggest,” says ThinkEquity senior analyst Atul Bagga. “In a broad sense, the rivals aren’t competing with each other. Everyone is competing with Netflix.” But at best, Netflix’s richer competitors will only push up the prices of studio contracts, and at worst, they could successfuly steal away exclusive contracts, leaving Netflix (NASDAQ:NFLX) with second-rate content and unsatisfied customers leaving for greener pastures.