Facebook Credible Threat to Netflix

The news media has been buzzing lately about the Warner Bros. deal with Facebook to let Facebook users watch the studio’s blockbuster, The Dark Knight, for only 30 credits, which is $3.00. This is a huge deal for both Facebook and Warner Bros., especially considering that Facebook has over 500 million logged in users compared to Netflix’s 20 million logged in users. The distribution potential that Facebook has is massive, and had a negative impact on the Netflix stock price, brining down the stock 6% on the news.

Goldman Sachs investment banking analyst, Ingrid Chung, commented on the news: ”Facebook’s foray into pay-per-view does not impact our Netflix estimates,” she said in a report. “However, Facebook represents a new potential entrant that few in the investment community were concerned with prior to this announcement, so we believe it does indeed represent an incremental negative for Netflix shares. ” She added that Facebook “could some day become a credible threat to Netflix.”

What’s our take on the news? Goldman Sachs is right not to lower revenue estimates for Netflix.  Netflix is monetizing customers effectively and continues to acquire millions of users. Also, Netflix has deals with hundreds of device makers to make their content available in homes across the US. Facebook, however, is generally confined to your mobile phone or laptop, making it a sub-par experience.