Nine Entertainment Co Holdings Ltd (ASX: NEC) held an investor day last week and guided for flat earnings before interest and tax and a 10% increase in net profit after tax in 2015. The market had been expecting a 2% rise in EBIT and subsequently Nine's share price fell nearly 4% over the week.
Analysts expect Nine to take an even greater share of the local advertising market, primarily from struggling rival Ten Network Holdings Limited (ASX: TEN). Nine's market share is predicted to rise to 39.2% from 38.7% last year.
The impact of Netflix
Massive US video-on-demand company Netflix, Inc. (NASDAQ: NFLX) announced last week that it will enter the Australian market from March 2015. While the pricing plans and content details are yet to be released, I believe Australia's free-to-air networks should be worried.
While Netflix will probably have a limited impact on the local advertising market initially, its entry will force Nine and partner Fairfax Media Limited (ASX: FXJ) to roll out their competing service with more haste. The joint venture already has deals in place with Sony and MGM studios, and a deal with Warner Bros is expected soon in preparation for a December launch. I must admit though, I've heard very little about it so far, the Netflix announcement has achieved much greater press coverage and could impact the take-up of the service.
Eyes on TV
The greatest impact of Netflix's entry into Australia, assuming it has a competitive catalogue of shows, will likely be on Foxtel's owners and stakeholders Telstra Corporation Ltd (ASX: TLS) and News Corp (ASX: NWS). Already approximately 200,000 Australians already access the US Netflix using a VPN, paying NetFlix's US subscription fee as Foxtel's product is significantly more expensive for an inferior range of shows.
Should Nine Investors be Concerned?
I believe they should be. While NetFlix will likely have little direct impact on the local advertising market, the company will no-doubt reduce the number of TV viewers on channel Nine and Ten each night. This in-turn will cut the money advertisers will be prepared to pay for ads and reduce the overall market revenue.
The Motley Fool only invests in companies that have competitive advantages over peers. As can be seen, Nine is currently at the mercy of larger international corporations encroaching on its territory. Investors should instead look for companies that are changing the market positively and in charge of their future.
