Market Overview

Can Verizon Build a Better Netflix?

The cellular giant is planning an assault on Netflix with a streaming video service of its own. But will it be any better than what's already available?

In a Reuters exclusive, it has been revealed that the new service could be introduced in the coming year. While this information has yet to be confirmed – Verizon (NYSE: VZ) has not made any official announcements – two of Reuters' sources claim the service could be limited in scope.

How limited? One source in particular (who, of course, was not named) said that Verizon's offering may be similar to Starz Play from Liberty Media (NASDAQ: LMCA) or Epix HD from Viacom (NASDAQ: VIA). That source also claimed that the service could involve children's programming from a partner, such as Viacom or Disney (NYSE: DIS).

Chances are it is way too early to say what features will or won't make it into Verizon's service. But if we are to take the sources at their word (and we might as well if we're going to believe the service even exists), let's take a look at the potential windfalls and pitfalls.

More Focus, Less Money

One of the problems Netflix has faced this year is gaining and maintaining content that people want to see. The company was quick to brag when it announced that it signed a multi-year agreement with DreamWorks Animation (NYSE: DWA), which would bring movies like Shrek and How to Train Your Dragon to Netflix. However, the company was much less eager to talk about the fact that it lost Disney – and all of the amazing, record-breaking Pixar films – the moment it let Starz walk out the door.

This may only be one area of concern (animation/family films), but it is one of many areas that Netflix has to focus on. Netflix was designed to be the all-encompassing service that consumers can't live without. And when it loses a studio, no matter how big or small, its departure can have quite a significant impact.

If, however, Netflix was only expected to focus on one area of entertainment, the company would have more resources available for that particular area. It may have also been able to form a new with Starz.

This is where Verizon could have an advantage in narrowing its focus. But that's not the only benefit of building a content-specific service. Since Verizon's expenses would be lower than that of Netflix or Hulu, the company could afford to charge a lower monthly fee.

Charge Less Today, Make More Tomorrow

Suppose Verizon launches a family-oriented streaming video service (like the one described above) for around $5 a month. For the average family, this is perfect; your kids would have the option to watch a ton of videos for three dollars less than Netflix.

Let's assume this service does well and that Verizon is inspired to create a streaming video service for mature (R-rated) content. Then it decides to make one for the PG-13 market. Then another, more specific service filled with teen comedies. Maybe a fourth would focus on drama, and so on.

Before you know it, Verizon has several individual streaming services available, each at $5 a month. Consumers who want them all would pay much more than consumers are currently paying for Netflix. But, under the rules of my speculation, they would also gain access to many more videos.

This would be huge for Verizon, for streaming video companies, and for cable companies like Comcast (NASDAQ: CMCSA) and Time Warner (NYSE: TWC), which fear that pay TV is a dying species. If Verizon could justify a way to eventually get consumers to pay more – and offer individualized, lower-cost options for those who wish to pay less – the company could do serious damage to the Netflix model. This would also reinforce the concept of pay TV. Whether subscribing to cable or an online service, entertainment providers don't really care how you get your content so long as you pay.

Hmm. I think I just wrote the perfect business plan for Verizon.

The Verizon Brand

While the aforementioned strategy could be huge, TechCrunch speculates that Verizon could have a difficult time selling itself as a streaming video leader.

“I don't want to condemn a service that hasn't even been born yet, but Verizon isn't exactly a popular consumer brand, at least for this kind of thing,” TechCrunch's Devin Coldewey wrote. “Want signal in remote areas? Everyone will tell you ‘Verizon.' Want to stream a movie? Not many would make that connection.”

Coldewey is right. But when it comes to entertainment, people don't care about the name as much as they care about content. For proof, you don't need to look any further than Hulu. This is a company that went from a small startup by Fox and NBC to a big and powerful streaming entity that features content from a wide variety of sources. CBS (NYSE: CBS) is currently the only major network not showing its videos on Hulu. Thus, when consumers want to watch their favorite TV series online, they turn to Hulu.

Verizon could take a similar path and slowly build up the Verizon name as a streaming video leader by gradually increasing (but never eliminating) the content that's available.

ACTION ITEMS:

Bullish:

Investors who like the idea of a streaming video service from Verizon should consider the following:

  • Either Apple iOS (NASDAQ: AAPL) or Google Android (NASDAQ: GOOG) would get the inevitable Verizon video app at launch. Whichever company gets it first stands to benefit the most.
  • CBS has been awfully nice to Netflix, but fairly standoffish to Hulu. If Hulu doesn't act fast, the network's next major partnership could be with Verizon.

Bearish:

If you doubt this rumor or think that Verizon should stick to cellular plans instead of streaming video content, consider the following alternatives:

  • Every month, Amazon Prime (NASDAQ: AMZN) seems to grow a little stronger.
  • Netflix could always pick up again. Maybe. Possibly. Hopefully?

Follow me @LouisBedigian

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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