Will Comcast and Verizon Crush Netflix?

2012 has been the year of new streaming video services. Coinstar's (NASDAQ: CSTR) Redbox and Verizon Communications (NYSE: VZ) announced earlier this month that they will partner up to launch a new service to challenge the market leader Netflix (NASDAQ: NFLX).

In addition, just two days ago Comcast (NASDAQ: CMCSA) unveiled its plans to enter the competition by offering a streaming video service to its Xfinity customers. In the future, Comcast is also planning to make this service available on additional devices such as Xbox 360 and Android gadgets.

The shares of Netflix have reacted strongly to the news of increasing competition and the stock is down 11 percent since Comcast's announcement to enter the streaming video market. Thus, the question is whether traders are just overreacting to the news or is the new competition actually a serious threat to Netflix.

A Dawson James analyst, Justin Colatosti, who has a sell rating and a $50 price target on Netflix noted that even a minor competition is a serious threat to Netflix, which is already operating at razor thin margins. Colatosti pointed out that Netflix' content cost is exploding, which significantly hurts the company's profitability.

Therefore, Netflix should take some drastic strategic changes, such as, right-sizing its content offering. According to Colatosti, Netflix cannot offer everything for everyone, as the company's cash flow and growth does not support new content deals. The alternative option is to rapidly grow Netflix' subscriber base, but Colatosti said he does not see this as a feasible option because Netflix already captures approximately 50 percent of the U.S. broadband users.

In fact, the company has been losing domestic subscribers and Colatosti is not expecting the international growth to offset these losses. He noted that Netflix is facing a fierce competition in the United Kingdom and Ireland from Amazon (NASDAQ: AMZN) and that Latin America would be the best option for international growth, but it would take approximately five years until the demographics in the region are favorable.

Out of the new competitors, Colatosti sees the Verizon-Redbox joint venture as the most serious threat because it is the only service that will be available to universally to all the consumers. Other competitors' services, such as, Dish Network's (NASDAQ: DISH) Blockbuster and Comcast are only available to the current subscribers and essentially serve as “sweeteners” to keep the current customers and attract a larger user base. Colatosti also mentioned that the large competitors have the ability to run their streaming services at a loss, whereas Netflix is dependent on its subscriber revenues.

Overall, the high dependency on subscriber revenues and increasing competition on content deals makes Netflix very reliant on the growth of its customer base. This might put more downward pressure on the company's shares that have rallied over 60 percent year-to-date.

You can follow me on Twitter @TuomoKallio.

Personal disclosure: Long VZ