Nightmare on Netflix Street

Few companies have been able to radically transform their business model. But
Netflix (NASDAQ: NFLX ) is one of the exceptions. For the most part, it has done
a great job of transitioning from mail-delivery to video streaming. But the
process has not been smooth. For example, yesterday Starz announced it would not
renew its content deal with Netflix. On the news, the shares of the company fell
9% to $212.12. The Starz agreement which was formed back in 2008 set the
template for future content deals. It allowed for the streaming of newer
releases from Sony (NYSE: SNE ) and Disney (NYSE: DIS ). But unless negotiations
revive, the contract will terminate on Feb. 28, 2012. While losing Starz is a
big setback, it still is not a killer. Keep in mind that Netflix has been
aggressive with the acquisition of content from the major broadcast/cable
networks, as well as various studios like MGM and Paramount. In fact, by the
fourth quarter, the Starz content will only account for 5% to 6% of the domestic
Netflix viewing. Fine, huh? Well, there still are concerns. The Starz blow-up
points to the fact that the licensing fees for content are escalating. Companies
like Amazon (NASDAQ: AMZN ) and Apple (NASDAQ: AAPL ) are likely to attempt to
lock up streaming deals. So, does Netflix have the wherewithal to deal with such
pressures? As seen with the Starz situation, it seems the company is not going
to get too wild with its wallet. Consider that a deal could have cost $300
million per year. Yes, the fiscal discipline is good news. But this does not
necessarily make Netflix a good investment. The shares still are far from cheap,
trading at about 53 times earnings. This valuation could be hard to sustain,
especially in light of the slowing economy and the pressures from rivals. Thus,
for investors, it probably is a good idea to be cautious on this one. Tom Taulli
is the author of various books, including "All About Commodities." He does
not own a position in any of the stocks named here.