Netflix & EPIX… Pipe Dreams? (NFLX, VIA-B, LGF, CSTR)

There may be some fears that Netflix, Inc. (NASDAQ: NFLX) has peaked or that its growth trajectory may not be as sustainable as it had been.  A new deal announced today that sounds like a good deal on the surface has shares lower despite the good news for Netflix subscribers under the partnership.  EPIX, a pay-based cable service, has agreed to supply Netflix with new movies from its partners.  EPIX is a joint venture between Viacom Inc. (NYSE: VIA-B), its Paramount Pictures unit, Metro-Goldwyn-Mayer Studios Inc., and Lions Gate Entertainment Corp. (NYSE: LGF).

The deal is a five-year pact that will allow Netflix subscribers to watch Epix partners’ movies through the Netflix streaming web service. Epix will make its new releases and other titles available to Netflix subscribers 90 days after those titles debut on pay-TV and on-demand where the titles generate a higher sale for Epix.  If the L.A. Times is right, this will send about $1 billion in license fees to Epix and its partners over the course of the term.

Netflix has been one force in killing Blockbuster along with a slew of other factors.  There is also competition that the company faces.  Coinstar Inc. (NASDAQ: CSTR) has the Redbox video rental service that is located in grocery stores and other settings.  While Coinstar was hit on its growth rates, these boxes are a threat as newer boxes can hold more titles.

The move to streaming video and higher postal rates in 2011 and beyond may also increase its operating costs and lower the margins as the company has a hard time passing on higher costs. More than 60% of customers have opted for a streaming service according to the company.  Netflix also seems to have more demand for its lower-priced service over the premium service, and that means that Netflix will have to add even more and more subscribers to keep up with growth targets.

Despite a continually surging membership growth, Netflix is unlikely to be able to continually add subscribers.  As with all high growth stories, there is only so much market penetration that can occur.  It is a great service and it also has many addicts.

Netflix shares are down 2.25% at $114.25 right after the open, although it is worth noting that this is already more than $1.00 above the early trading lows of $113.20.

JON C. OGG